CFA Institute CFA-LEVEL-1 Online Practice Questions and Exam Preparation

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 811:

  A closed-end investment company

  A. is a type of mutual fund.
  B. has stock that trades on a secondary market.
  C. typically repurchases shares on demand.
  D. will typically offer more share issues after the initial share offering.
  B. has stock that trades on a secondary market.

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  Explanation

  A mutual fund is an open-end investment company. A closed-end investment company is the other type of investment company. Its stock trades on a secondary exchange, and the stock price is determined by market supply and demand. The company's asset is the portfolio that it invests in securities.

• Question 812:

  Which of the following statements about the cost of capital is incorrect?

  A. The cost of retained earnings is equal to the return stockholders could earn on alternative investments of equal risk.
  B. WACC calculations should be based on after-tax costs of capital.
  C. Flotation costs can increase the WACC.
  D. If a company's tax rate increases, then, all else equal, its weighted average cost of capital will increase.
  E. A company's target capital structure affects its WACC (Weighted Average Cost of Capital).
  D. If a company's tax rate increases, then, all else equal, its weighted average cost of capital will increase.

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  Explanation

  A tax rate increase would lead to a decrease in the after-tax cost of debt and, consequently, the firm's WACC would decrease.

• Question 813:

  You wish to rank n different securities according to the deviation of the market price from your estimate of their intrinsic value. You are curious how many different ways this can come out. The counting method you should use is:

  A. The permutation rule.
  B. The multinomial formula.
  C. The binomial formula.
  D. None of these answers is correct.
  D. None of these answers is correct.

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  Explanation

  The factorial method allows you to determine the number of ways of arranging n things. Initially, there are n choices for the first item, then n-1 for the second, and so on. The number of combinations is therefore n! = n * (n-1) * (n-2) * (n-3) * ...

  * (1).

• Question 814:

  Mutual fund A is a 7% load-fund, which you expect to have a rate of return of about 17%. Mutual fund B is a no-load fund, which is expected to have a rate of return of around 9%. If your investment horizon is 1 year, which fund should you invest in and what is your expected net rate of return?

  A. A; 8.8%
  B. A; 9.35%
  C. B; 9.0%
  D. none of these answers
  C. B; 9.0%

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  Explanation

  With fund A, a deposit of $100 will give you shares worth $93 after the load charge is taken into account. This amount is expected to grow to 93*(1+0.17) = $108.81. Thus, the net return with fund A is expected to be 8.8%. Hence, for a 1-year horizon, you should select fund B, which is expected to return 9%.

• Question 815:

  Which of the following is/are true about the DOL?

  I. The DOL measures the change in EBIT for a given change in the quantity sold.

  II. The DOL is zero at the break-even level.

  III.

  The DOL decreases as the level of sales increases.

  A. I only
  B. II and III
  C. I, II and III
  D. III only
  E. II only
  D. III only

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  Explanation

  The DOL measures the percentage change in EBIT for a given percentage change in the quantity sold. At a sales level of Q units, DOL = Q(P-V)/[Q(P-V) - FC] Hence, at the break-even level, the DOL is infinite but decreases as the sales increase.

• Question 816:

  Which of the following statements is most correct?

  A. An increase in the flotation cost incurred in selling new stock will reduce the retained earnings break point, as long as the dollar level of retained earnings and the fraction of capital which is equity financed remains constant.
  B. None of these answers are correct.
  C. All of these answers are correct.
  D. An increase in a firm's corporate tax rate, will increase the firm s cost of debt capital, as long as the yield to maturity on the company's bonds remains constant or falls.
  E. An increase in the flotation cost incurred in selling new stock will increase the cost of retained earnings.
  B. None of these answers are correct.

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  Explanation

  An increase in the flotation cost has no effect on the cost of retained earnings or the retained earnings break point. An increase in the firm's corporate tax rate reduces the after-tax component cost of debt.

• Question 817:

  Consider the following graph of the Security Market Line (SML). The letters X, Y, and Z represent risky asset portfolios. The SML crosses the y-axis at the point 0.07. The expected market return equals 13. 0 percent. Note: The graph is NOT drawn to scale.

  Using the graph above and the information provided, determine which of the following statements is TRUE.

  A. Portfolio Y is undervalued.
  B. The correct label for the x-axis is total risk.
  C. Portfolio X's required return is greater than the market expected return.
  D. The expected return (or holding period return) for Portfolio Z equals 14. 8%.
  D. The expected return (or holding period return) for Portfolio Z equals 14. 8%.

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  Explanation

  At first, it appears that we are not given the information needed to calculate the holding period, or expected return (beginning price, ending price, or annual dividend). However, we are given the information required to calculate the required return (CAPM) and since Portfolio Z is on the SML, we know that the required return (RR) equals the expected return (ER). So, ER = RR = Rf+ (ERM?Rf) * Beta = 7. 0% + (13. 0% - 7. 0%) * 1.3 = 14. 8%. The SML plots beta (orsystematic risk) versus expected return, the CML plots total risk (systematic plus unsystematic risk) versus expected return. Portfolio Y is overvalued ?any portfolio located below the SML has an RR>; ER and is thus overpriced. Since Portfolio X plots above the SML, it is undervalued and the statement should read, "Portfolio X's required return islessthan the market expected return."

• Question 818:

  In a statement of cash flows done using the indirect method all of the following would be included as cash flows from investing activities except for:

  A. purchase of fixed assets.
  B. sale of fixed assets.
  C. all would be included as cash flows from investing activities.
  D. gain on sale of equipment.
  D. gain on sale of equipment.

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  Explanation

  Gains and losses on the sale of fixed assets are included in cash flows from operating activities. The amount included in the investing activities area is the amount of the asset on the books of the company.

• Question 819:

  What is the present value today of these annual cash flows: $3,000, $2,000, $1,000? Assume the first cash flow occurs 1 year from today and an interest rate of 10% per year, compounded annually.

  A. $5,205. 67
  B. $5,131.48
  C. $6,089.92
  D. $5,067. 65
  E. $6,000.00
  B. $5,131.48

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  Explanation

  You could solve this question using 3 different compound interest problems, but it is easier to solve them using the calculator's cash flow functions. On the BAII Plus, press CF 2nd CLRWork 0 ENTER DownArrow 3000 ENTER DownArrow DownArrow 2000 ENTER DownArrow DownArrow 1000 ENTER DownArrow DownArrow 2nd Quit. Then press NPV 10 ENTER DownArrow CPT. On the HP12C, press these keys: 0 BlueShift CFo 3000 BlueShift CFj 2000 BlueShift CFj 1000 BlueShift CFj. Then press 10 i, YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure that the BAII Plus has the P/Y value set to 1.

• Question 820:

  Technical analysts tend to believe that

  A. successful fundamental analysis is impossible.
  B. financial statements contain all relevant information needed to price stocks.
  C. successful fundamental analysis is difficult.
  D. the majority of investors can earn above-average returns through fundamental analysis.
  C. successful fundamental analysis is difficult.

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  Explanation

  Technical analysts tend to believe that while successful fundamental analysis is possible, it is very difficult to achieve. They contend that since most fundamental analysis is heavily dependent on financial statements, which do not contain all relevant stock pricing information, most investors cannot consistently earn above-average returns using that method.