Cisco®
Oracle
CompTIA
Checkpoint
ISC
EC-Council
EXIN
Fortinet
ITIL®
Juniper
Microsoft
VMware
Avaya
SAP
Google
Salesforce
Amazon
Palo Alto Networks
ISC2
Splunk®
All Vendors
  2. Home
  3. Exams
  4. Test Prep
  5. CFA-Level-I

Free Test Prep CFA-Level-I Exam Questions (page: 2)

Page 2 of 496
PDF with 3963 Questions

According to the AIMR-PPS, ________ are defined to include all discretionary and nondiscretionary assets.

  1. individually managed assets
  2. individual investor's assets
  3. total firm assets
  4. global assets

Answer(s): C

Explanation:

Total firm assets are defined to include all discretionary and nondiscretionary assets. Total firm assets don't refer to assets underlying overlay investment strategies, such as currency overlay, options and futures overlays, securities lending programs and asset allocation overlay strategies, unless the firm actually manages the underlying assets.



Ameriscam, Inc. is considering the issuance of some perpetual preferred stock. The Company's corporate tax rate is 30%, and the yield on its outstanding senior debt is 7.55%. Additionally, Ameriscam has been told by a leading investment bank that if issued, its preferred stock would merit a price of $40 net of flotation costs and other charges. If issued, the firm plans to dedicate preferred annual dividends of $2.35 per share. What is the cost of the proposed preferred stock for this firm?

  1. The cost of preferred stock cannot be calculated from the information supplied.
  2. 2.265%
  3. 7.98%
  4. 0.0875%
  5. 5.875%

Answer(s): E

Explanation:

The cost of preferred stock can be found by dividing the annual dividend by the issuing price, which is net of any underwriting, or "flotation," charges. The cost of preferred stock in this example is very low. Typically, the cost of preferred stock is greater than the cost of debt but less than the cost of common equity.



Petersen Co. has a capital budget of $1,200,000. The company wants to maintain a target capital structure, which is 60 percent debt and 40 percent equity. The company forecasts that its net income this year will be $600,000. If the company follows a residual dividend policy, what will be its payout ratio?

  1. 20%
  2. 80%
  3. 60%
  4. 40%
  5. 0%

Answer(s): A

Explanation:

The amount of new investment, which must be financed with equity, is: $1,200,000 x 40% = $480,000. Since the firm has $600,000 of net income only $120,000 will be left for dividends. This means the payout ratio is $120,000/$600,000 = 20%.



In theory, the decision-maker should view market risk as being of primary importance. However, within-firm, or corporate, risk is relevant to a firm's

  1. All of the answers are correct.
  2. None of the answers are correct.
  3. Creditors, because it affects the firm's credit worthiness.
  4. Management, because it affects job stability.
  5. Well-diversified stockholders, because it may affect debt capacity and operating income.

Answer(s): A

Explanation:

These are all relevant to a firm's corporate risk, which is measured by the project's impact on uncertainty about the firm's future earnings.



Arizona Rock, an all-equity firm, currently has a beta of 1.25, and k(RF) = 7 percent and k(M) = 14 percent. Suppose the firm sells 10 percent of its assets (beta = 1.25) and purchases the same proportion of new assets with a beta of 1.1. What will be the firm's new overall required rate of return, and what rate of return must the new assets produce in order to leave the stock price unchanged?

  1. 15.750%; 15.645%
  2. 14.750%; 15.750%
  3. 15.645%; 14.700%
  4. 15.750%; 14.700%
  5. 15.645%; 15.645%

Answer(s): C

Explanation:

b(old, firm) = 1.25.
k(old, firm) = 0.07 + (14 - 7)1.25 = 15.75%.
b(new, firm) = 0.9(1.25) + 0.1(1.1) = 1.235.
k(new, firm) = 0.07 + 1.235(0.07) = 15.645%.
k(new, assets) = 0.07 + 1.1(0.07) = 14.7%.



In order for the NPV and MIRR methods to consistently produce similar rankings, the projects being examined must possess which of the following characteristics? Choose the best answer.

  1. Projects must be independent and equal in size
  2. Projects must equal in scale and be mutually exclusive
  3. Projects must be profitable and have normal cash flows
  4. Projects must equal in scale and have the same life
  5. Projects must equal in scale and have identical cash flows
  6. Projects must have equal lifespans and normal cash flows

Answer(s): D

Explanation:

When examining mutually-exclusive projects with normal cash flows, the MIRR and NPV methods will ALWAYS produce similar results as long as the projects being examined are equal in size and have the same life.



Which of the following projects would likely produce multiple Internal Rates of Return? Assume a 14% discount rate.
Project A
Initial investment outlay: ($500,000)
t1: $900,000
t2: ($100,000)
t3: ($100,000)
t4: ($10,000)
Project B
Initial investment outlay: ($500,000)
t1: $0.00
t2: $650,000
Project C
Initial investment outlay: ($50,000)
t1: $0.00
t2: $0.00
t3: $65,000
t4: $0.00
t5: $0.00
t6: $65,000
Project D
Initial investment outlay: ($1,000,000)
t1: $675,000
t2: $675,000
t3: ($1,500)
t4: $1,500
Project E
Initial investment outlay: ($1,000,000)
t1: $0.00
t2: $0.00
t3: $0.00
t4: $0.00
t5: $2,000,000

  1. Project A, D, and E
  2. Project A and D
  3. Project C
  4. All of these projects will likely result in multiple Internal Rates of Return.
  5. Project B
  6. Project A

Answer(s): B

Explanation:

First of all, the cost of capital is irrelevant in Internal Rate of Return calculations. What is being examined in this example is the determination of "normal" versus "non-normal" projects. Non-normal projects are classified as projects that possess non-normal cash flows. In evaluating projects with "non-normal cash flows" the Internal Rate of Return method will often produce multiple IRRs which leads to an incorrect accept/reject decision. Non- normal cash flows are defined as cash flows in which the sign changes more than once. Projects A and D involve cash outflows superimposed within their cash inflows, resulting in a sign change from positive to negative and negative to positive. In examining projects such as this, it is advisable to use either the NPV or MIRR methods, which are not subject to the problem of multiple IRRs. From observation alone, we can determine that project A and D are non-normal projects, and are thus likely to result in multiple IRR calculations. While project B, C and E have periods of zero cash flows, each only has one change of sign in the overall cash flow process, and therefore all three projects should be characterized as "normal" for purposes of examination. While the cost of capital has been provided, it is not necessary for the determination of the correct answer in this case. What you should look for are projects with non-normal cash flows, and this should not involve any computational analysis. Besides, the cost of capital is not incorporated into the Internal Rate of Return calculation, rather, it is a component of the NPV and MIRR computational methods.



Cochran Corporation has a weighted average cost of capital of 11 percent for projects of average risk. Projects of below-average risk have a cost of capital of 9 percent, while projects of above-average risk have a cost of capital equal to 13 percent. Projects A and B are mutually exclusive, whereas all other projects are independent. None of the projects will be repeated. The following table summarizes the cash flows, internal rate of return (IRR), and risk of each of the projects.
Year (t)Project A Project B Project C Project D Project E
O-200,000-100,000-100,000-100,000-100,000
166,00030,00030,00030,00040,000
266,00030,00030,00030,00025,000
366,00040,00030,00040,00030,000
466,00040,00040,00050,00035,000
IRR12.1114.03810.84816.63611.630
ProjectBelowBelowAverageAboveAbove
RiskAverageAverageAverageAverage
Which projects will the firm select for investment?

  1. Projects: A, D
  2. Projects: B, C, D, and E
  3. Projects: B, D
  4. Projects: B, C, and D
  5. Projects: A, B, and D

Answer(s): A

Explanation:

Look at the NPV, IRR, and hurdle rate for each project:
ProjectABCDE
Hurdle9.00%9.00%11.00%13.00%13.00%
NPV$13,822$11,998
IRR12.11%14.04%10.85%16.64%11.63% Projects A and B are mutually exclusive, so we pick project A because it has the largest NPV. Projects C, D, and E are independent so we pick the ones whose IRR exceeds the cost of capital, in this case, just D. Therefore, the projects undertaken are A and D.



Viewing page 2 of 496



Post your Comments and Discuss Test Prep CFA-Level-I exam prep with other Community members:

CFA-Level-I Exam Discussions & Posts