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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 851:

  What is the effective date for compliance with the AIMR-PPS for U.S. and Canadian investments?

  A. January 1, 1995
  B. January 1, 1992
  C. January 1, 1993
  D. January 1, 1994
  C. January 1, 1993

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  Explanation

  From January 1, 1993, going forward, all of the firm's actual discretionary fee-paying nontaxable portfolios solely invested in U.S. and/or Canadian investments ("North American Portfolios") must be presented in composites that adhere to the Standards.

• Question 852:

  Which of the following approaches determines the value by finding the amount it would take to rebuild it at today's prices for land, labor and construction materials?

  A. Cost approach
  B. Income approach
  C. Current pricing approach
  D. Comparative sales approach
  A. Cost approach

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  Explanation

  Cost approach determines value by assessing how much it would cost to rebuild it at today's prices for land, labor and construction methods.

• Question 853:

  The management of Clay Industries have adhered to the following capital structure: 50% debt, 45% common equity, and 5% perpetual preferred equity. The following information applies to the firm:

  Before-tax cost of debt = 9.5%

  Combined state/federal tax rate = 35%

  Expected return on the market = 14. 5%

  Annual risk-free rate of return = 6. 25%

  Historical Beta coefficient of Clay Industries Common Stock = 1.24 Expected annual preferred dividend = $1.55

  Preferred stock net offering price = $24. 50

  Annual common dividend = $0.80

  Common stock price = $30.90

  Expected growth rate = 9.75%

  Subjective risk premium = 3. 3%

  Given this information, and using the Discounted Cash Flow (DCF) approach, what is the Weighted Average Cost of Capital for Clay Industries?

  A. The WACC for Clay Industries cannot be calculated from the information.
  B. 8.96%
  C. 13. 05%
  D. 12. 34%
  E. 7. 70%
  F. 9.97%
  B. 8.96%

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  Explanation

  The calculation of the Weighted Average Cost of Capital is as follows: {fraction of debt * [yield to maturity on outstanding long-term debt][1-combined state/federal income tax rate]} + {fraction of preferred stock * [annual dividend/net offering price]} + {fraction of common stock * cost of equity}. The cost of common equity can be calculated using three methods, the Capital Asset Pricing Model (CAPM), the Dividend-Yield-plus-Growth-Rate (or Discounted Cash Flow) approach, and the Bond- Yield-plus-Risk-Premium approach. In this example, you are asked to calculate the cost of common equity using the Discounted Cash Flow, or Dividend-Yield-plus-Growth-Rate approach. To calculate the cost of equityusing this approach, take the expected annual dividend on common equity ($0.80) divided by the market price of common stock ($30.90), and add the expected growth rate (9.75%) to this figure. Using this method, the cost of common equity is found to be 12. 34%. The after-tax cost of debt can be found by multiplying the yield to maturity on the firm's outstanding long-term debt (9.5%) by (1-tax rate). Using this method, the after-tax cost of debt is found as 6. 175%. The calculation of the cost of perpetual preferred stock is relatively straightforward, simply divide the annual preferred dividend by the net offering price. Using this method, the cost of preferred stock is found as 6. 327%. Incorporating these figures into the WACC equation gives the answer of 8.957%.

• Question 854:

  Assume you are the director of capital budgeting for an all-equity firm. The firm's current cost of equity is 16 percent; the risk-free rate is 10 percent; and the market risk premium is 5 percent. You are considering a new project that has 50 percent more beta risk than your firm's assets currently have, i.e., its beta is 50 percent larger than the firm's existing beta. The expected return (IRR) on the new project is 18 percent. Should the project be accepted if beta risk is the appropriate risk measure?

  A. Yes; its IRR is greater than the firm's cost of capital.
  B. No; a 50 percent increase in beta risk gives a risk-adjusted required return of 24 percent.
  C. No; the project's risk-adjusted required return is 1 percentage point above its IRR.
  D. Yes; the project's risk-adjusted required return is less than its IRR.
  E. No; the project's risk-adjusted required return is 2 percentage points above its IRR.
  C. No; the project's risk-adjusted required return is 1 percentage point above its IRR.

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  Explanation

  Calculate the beta of the firm, and use to calculate project beta:

  k(s) = 0.16 = 0.10 + (0.05)b. b = 1.2.

  b(Project) = b(Firm)1.5 b(Project) is 50% greater than current b(Firm)

  b(Project) = (1.2)1.5 = 1.8.

  Calculate required return on project, k(Project), and compare to IRR.

  Project: k(Project) = 0.10 + (0.05)1.8 = 0.19 = 19%. IRR = 0.18 = 18%.

  Since the required return is one percentage point greater than the expected IRR, the firm should not accept the new project.

• Question 855:

  An investor takes a long position in a corn futures contract. Initial margin on the contract is 10% of the contract value and maintenance margin is half of the initial margin. If, at the beginning of the second trading day for the contract, the investor receives a margin call, it is least likely that:

  A. variation margin is greater than maintenance margin.
  B. the final trade from the previous day is greater than the contract price.
  C. the average of the last few trades from the previous day is less than the contract price.
  B. the final trade from the previous day is greater than the contract price.

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  Explanation

• Question 856:

  Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are correct.

  Cash from operating activities $60,000

  Net Income (4,000)

  Depreciation (2,000)

  Increase in accounts receivable (1,000)

  Increase in deferred tax liability $53,000

  Cash from investing activities ($48,000)

  Purchase of marketable securities 2,500

  Dividends received 1,500

  Dividends paid ($44,000)

  Cash from financing activities (500)

  Increase in Short-term debt (2,500)

  Increase in Long-term debt ($3,000)

  Increase in cash $6,000

  The correct Cash flows from investing activities is ________.

  A. ($45,500)
  B. ($41,000)
  C. None of these answers
  D. ($48,000)
  D. ($48,000)

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  Explanation

  The dividends received is an operating activity and the dividend paid is a financing activity.

• Question 857:

  Which is true of positively skewed distributions?

  I. They have a limited, but frequent, upside.

  II. Their downside is less frequent but more unlimited.

  III.

  They are attractive to investors because their mean is larger than their median.

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

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  Explanation

  I and II are false. The correct statements for them would be: 1) positively skewed distributions have a limited, but frequent, downside, and 2) they have a less frequent, but more unlimited, upside. III is true.

• Question 858:

  Restricted cash balances are ________.

  A. non-current assets
  B. not considered assets
  C. none of these answers
  D. regarded as part of long-term equity
  A. non-current assets

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  Explanation

  At times, firms earmark cash deposits and balances for meeting longer term obligations like sinking funds or plant expansions. Such restricted cash balances are reported as non-current assets even though they are in a liquid form, since they are not available to satisfy current liabilities.

• Question 859:

  Which one of the following will most likely cause a depreciation in the U.S. dollar on the foreign exchange market under a system of flexible exchange rates?

  A. a sudden increase in the demand for California cabernet wines by Europeans
  B. an increase in real interest rates among European nations
  C. a switch from French stocks and bonds to U.S. stocks and bonds by U.S. speculators
  D. rampant inflation in Japan, a major trading partner of the U.S.
  B. an increase in real interest rates among European nations

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  Explanation

  An increase in real interest rates abroad will cause the demand for high yield assets in those countries to increase. As a result the demand for assets in the U.S. will fall, as will the demand for U.S. currency. The U.S. dollar will depreciate under falling demand.

• Question 860:

  Which of the following is not one of the five steps in the hypothesis testing procedure?

  A. Identify the test statistic
  B. All of these answers are part of the five steps
  C. Select a level for beta
  D. State the null and alternate hypothesis
  E. Formulate a decision rule
  C. Select a level for beta

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  Explanation

  The beta is determined by our choice of the decision rule and significance level. It is not determine on the outset.