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Free Test Prep CFA-Level-I Exam Questions (page: 24)

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If a new option contract is listed on an option exchange and only one trader buys one contract in the first day, the open interest after that day is:

  1. two contract.
  2. zero contract.
  3. cannot be determined with this information.
  4. one contract.

Answer(s): D



A property has a potential gross rental income (PGRI) of $740,000. Operating expenses, excluding insurance and property taxes, amount to 30 percent of gross rents. Insurance and property taxes total $16,800. If the market capitalization rate is 22 percent, what is the value of this property?

  1. $1,726,667.
  2. $2,410,667.
  3. $2,430,909.
  4. $2,278,182.

Answer(s): D

Explanation:



You need to estimate the market value of an income producing property located in your town. Through research you have found that the property should have net operating income of $956,000, taxes of $143,400, a capitalization rate of 16 percent, and an inflation rate of 3 percent. What is the estimated property value?

  1. $5,078,750.
  2. $5,975,000.
  3. $7,353,846.
  4. $8,456,923.

Answer(s): B

Explanation:



Based on the following information, what is the net asset value (NAV) per share. There are currently no expenses and no load.
Cap Stock Sold $109,000
Price per share $10

  1. $13.26.
  2. $27.03.
  3. $15.96.
  4. $27.03.

Answer(s): C

Explanation:



You are going to invest in a closed-end mutual fund and are told that the net asset value of the fund is $20.40, and the share price is $18.20. What is the discount you would receive or the premium that you would pay?

  1. 0.1209.
  2. -0.1209.
  3. -0.1078.
  4. 0.1078.

Answer(s): C

Explanation:



A fund to be purchased had a net asset value (NAV) of $72.40 and a load of 5 percent. What is the offering price per share?

  1. $76.211.
  2. $3.811.
  3. $76.020.
  4. $72.400.

Answer(s): A

Explanation:



Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock, which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Rollins is a constant growth firm, which just paid a dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to find k(s) (component cost of retained earnings). The firm's net income is expected to be $1 million, and its dividend payout ratio is 40 percent. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 40 percent. What is Rollins' cost of preferred stock?

  1. 12.6%
  2. 13.2%
  3. 11.0%
  4. 12.0%
  5. 10.0%

Answer(s): A

Explanation:

K(ps) (cost of preferred stock) = $12/$100 (0.95) = 12.6%.



A Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate.

The firm's preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will net only $80 per share from the sale of new preferred stock. Ross expects to retain $15,000 in earnings over the next year. Ross' common stock currently sells for $40 per share, but the firm will net only $34 per share from the sale of new common stock. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year.

What is the firm's cost of retained earnings?

  1. 15.5%
  2. 12.5%
  3. 10.0%
  4. 18.0%
  5. 16.5%

Answer(s): A

Explanation:

k(s) = $2.20/$40 + 0.10 = 15.5%.



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