CFA Level I

Question #1 of 40 Question ID: 1220464

To maximize the value of a firm and shareholder wealth, capital projects should be accepted at any point along a firm's
investment opportunity schedule that is:

A) above the firm’s average cost of capital curve.

B) below the firm’s marginal cost of capital curve.

C) above the firm’s marginal cost of capital curve.

Question #2 of 40 Question ID: 1220460

Shareholder interests are most likely better protected:

A) when board elections are staggered.

B) when a company is protected from hostile takeovers.

C) under a common law, rather than civil law, legal system.

Question #3 of 40 Question ID: 1220461

QuaryCo is determining whether to expand its current production capacity. A feasibility study completed one year ago indicates
that the rock in the new quarry site is of sufficient quality. The project would require an increase in working capital and the use of
an empty factory owned by the company. Several existing customers would be expected to purchase materials from the new
quarry due to its closer proximity. In evaluating the expansion project, QuaryCo should least appropriately consider:

A) cash expended to perform the feasibility study.

B) the increase in working capital required to support the project.

C) the effects of customers who will switch purchases to the new quarry.

Question #4 of 40 Question ID: 1220462

A graph that shows the relation between the cost of capital and the value that a project adds to the firm is best described as a
project's:

A) characteristic line.
B) net present value profile.
C) marginal cost of capital curve.

Question #5 of 40 Question ID: 1220469

Inventory turnover rates for a company were 8.3x in year 1, 8.1x in year 2, and 7.6x in year 3. The number of days of inventory
for the industry averaged 50 in year 1, 49 in year 2, and 48 in year 3. The company's inventory management has been:

A) in line with the industry average in each year.

B) improving over the last three years.

C) worsening over the last three years.

Question #6 of 40 Question ID: 1220467

If Samor Company's sales increase by 1%, both its earnings before interest and taxes and its earnings per share will increase by
1.5%. This implies that Samor:

A) has fixed operating costs and uses debt financing.

B) uses debt financing but has no fixed operating costs.

C) has fixed operating costs but does not use debt financing.

Question #7 of 40 Question ID: 1220468

Nagle Company produces a commodity with a market price of $3.25 per unit. Nagle forecasts production and sales of 900,000
units over the next quarter. Nagle's variable cost per unit is $3.75, and fixed operating costs are $400,000. Based on these
projections, it is most likely that:

A) Nagle’s contribution margin for the quarter is $0.50 per unit.

B) Nagle will experience an operating loss of $400,000 for the quarter.

C) Nagle’s breakeven quantity of sales for the quarter is 1,200,000 units.

Question #8 of 40 Question ID: 1220470

An analyst has discovered that over the last three years, Gathers Company has experienced a decrease in its net operating
cycle, while over the same time period the average net operating cycle for the industry (excluding Gathers) has increased. These
trends most likely indicate that:

A) Gathers has decreased its liquidity position by increasing the amount of time inventory
spends in its warehouses.

B) Gathers has increased its liquidity position by increasing the speed of cash collection
from its customers.
C) the industry has decreased its liquidity position by increasing the average amount of
time to pay suppliers.

Question #9 of 40 Question ID: 1220466

In estimating the cost of equity capital for a project in a developing country for a firm based in a developed country, using the
CAPM, an analyst should most appropriately:

A) increase the equity risk premium.

B) use the risk-free rate of the developing country.

C) estimate the project beta using the developing country’s equity market index.

Question #10 of 40 Question ID: 1220459

With respect to stakeholder management, a legal infrastructure is most accurately described as concerning:

A) rights and avenues of recourse.

B) regulations under which a company operates.

C) contracts between a company and its stakeholders.

Question #11 of 40 Question ID: 1220465

Allen Company's cost of preferred equity is 6.25%. The preferred pays a $2.50 dividend and has a par value of $50. The price of
Allen's preferred equity is closest to:

A) $30 per share.

B) $40 per share.
C) $50 per share.
Question #12 of 40 Question ID: 1220463

A company is evaluating a capital project that is expected to produce incremental future after-tax cash flows with a present value
of $12 million. If the profitability index for this project is 1.1, its net present value is closest to:

A) $1.10 million.
B) $1.15 million.
C) $1.20 million.

Question #13 of 40 Question ID: 1220483

In valuing the stock of Evergreen Enterprises, an analyst compiles the following information about the firm:

Expected constant growth rate of dividends 6%

Next year's expected earnings per share $4.24

Expected retention ratio 62.5%

Required rate of return 11%

The value of the firm's stock today is closest to:

A) $31.80.
B) $38.55.
C) $53.00.

Question #14 of 40 Question ID: 1220474

A mutual fund uses a momentum strategy, buying stocks that have been increasing in price and selling stocks that have been
decreasing in price. The most appropriate type of equity index to use as a benchmark is:

A) equal weighted.

B) fundamental weighted.
C) market capitalization weighted.

Question #15 of 40 Question ID: 1220480

An industry in which profitability growth is restricted by strong competition among many firms, overinvestment in capacity, and
weak brand loyalty is most likely in which phase of the industry life cycle?

A) Mature stage.
 B) Decline stage.
C) Shakeout stage.

Question #16 of 40 Question ID: 1220472

Jacques Fontenot wants to place an order to purchase 10,000 shares of BQ Inc. at a price of €75.00 or below. The shares are
currently trading for €82.10 bid and €82.20 ask. What type of order should Fontenot place?

A) Market order.
B) Stop loss order.
C) Limit order.

Question #17 of 40 Question ID: 1220477

Participating preference shares are most accurately described as preferred stock that:

A) may be exchanged for the firm’s common shares at a predetermined ratio.

B) receives extra dividends if the firm’s profits are greater than a predetermined level.
C) must be paid any omitted dividends from prior periods before the firm may pay
dividends to common shareholders.

Question #18 of 40 Question ID: 1220475

Sam Grant, CFA, publishes the Grant 50 Index, which consists of value stocks with small market capitalizations. The Grant 50
Index is best described as a:

A) style index.
B) sector index.

C) value weighted index.

Question #19 of 40 Question ID: 1220482

An analyst uses a temporary supernormal growth model to value a common stock. The company paid a $2 dividend last year.
The analyst expects dividends to grow at 15% each year for the next three years and then to resume a normal rate of 7% per
year indefinitely. The analyst estimates that investors require a 12% return on the stock. The value of this common stock is
closest to:
 A) $39.
B) $53.

C) $65.

Question #20 of 40 Question ID: 1220473

In a call market:

A) a single price that clears the market is set periodically.

B) trades may occur at any time during market hours.
C) prices are set by the highest dealer bid and the lowest dealer ask price.

Question #21 of 40 Question ID: 1220478

Compared with publicly traded firms, private equity firms most likely tend to:

A) focus more on long-term performance.

B) adopt stronger corporate governance policies.

C) be more closely regulated and have higher compliance costs.

Question #22 of 40 Question ID: 1220471

A dark pool is best described as:

A) an exchange with low trading volume.

B) the loans underlying a mortgage-backed security.
C) an alternative trading system that does not reveal current orders.

Question #23 of 40 Question ID: 1220481

Firms' pricing power is likely to be strongest in an industry that is characterized by:

A) overcapacity and high concentration.

B) undercapacity and high barriers to entry.
C) low barriers to entry and low concentration.
Question #24 of 40 Question ID: 1220476

A market researcher is analyzing the efficiency of the Oceania Securities Exchange (OSE). Market prices appear to incorporate
all prior price and volume information in a timely manner but are slow to incorporate the true value impact of earnings surprises.
The researcher determines that specialists on the floor of the OSE consistently earn positive risk-adjusted returns on average.
Which of the three forms of the Efficient Market Hypothesis best describes the OSE market?

A) Weak-form efficient.

B) Strong-form efficient.
C) Semistrong-form efficient.

Question #25 of 40 Question ID: 1220484

A drawback of using the price to book value ratio as a valuation tool is that book value:

A) is not appropriate for valuing firms with primarily financial assets.

B) may not be an accurate indicator of the value of a company’s assets and equity.
C) is ineffective in valuing companies that are not expected to continue as going concerns.

Question #26 of 40 Question ID: 1220479

Which of the following is most likely to increase a firm's return on equity?

A) Issuing new equity to retire debt.

B) Issuing new debt to retire common stock.

C) A decrease in the market value of its common stock.

Question #27 of 40 Question ID: 1220492

For an agency residential mortgage-backed security, the value most likely to be known at issuance is the:

A) default rate.
B) total interest payments.
C) total principal payments.
Question #28 of 40 Question ID: 1220485

Cash flows from a fully amortizing security include:

A) no balloon payment.
B) a single balloon payment.
C) a series of equal balloon payments.

Question #29 of 40 Question ID: 1220486

The difference between on-the-run and off-the-run U.S. Treasury securities is that on-the-run Treasury securities are:

A) traded only in the primary market, while off-the-run Treasury securities are traded only
in the secondary market.
B) generally less actively traded than off-the-run Treasury securities and provide less
reliable market yields.
C) the most recently auctioned Treasury securities in each maturity, while off-the-run
Treasury securities are issues auctioned previously.

Question #30 of 40 Question ID: 1220491

Based on the following rates:

1-year spot rate 2.0%

2-year spot rate 2.5%

3-year spot rate 3.0%

4-year spot rate 3.5%

The 2-year forward rate two years from now is closest to:

A) 3.25%.
B) 3.50%.
C) 4.50%.

Question #31 of 40 Question ID: 1220493

When analyzing the interest rate risk of the following bonds, which is most likely to require the use of effective duration?

A) 10-year, zero-coupon corporate bond.

 B) 10-year, 4% coupon mortgage-backed bond.

C) 5-year, zero-coupon non-sovereign government bond.

Question #32 of 40 Question ID: 1220489

Which of the following 2-year bonds most likely has a yield to maturity that can be interpreted as a spot rate?

A) Price = 88.36 percent of par, yield to maturity = 6.38%.

B) Price = 100.00 percent of par, yield to maturity = 5.19%.
C) Price = 103.85 percent of par, yield to maturity = 4.72%.

Question #33 of 40 Question ID: 1220498

Tunopani is an emerging market nation that issues sovereign debt denominated in its local currency and sovereign debt
denominated in a developed market currency. If Tunopani's local currency debt rating is A2/A, its foreign currency debt rating is
most likely to be:

A) lower.
B) higher.
C) the same.

Question #34 of 40 Question ID: 1220496

When calculating and interpreting a firm's leverage and coverage ratios, which component of traditional credit analysis is an
analyst most likely addressing?

A) Capacity.

B) Character.
C) Collateral.

Question #35 of 40 Question ID: 1220488

Debt securities that are combined with derivatives are referred to as:

A) secured bonds.
B) structured notes.
C) credit linked bonds.
Question #36 of 40 Question ID: 1220494

When is a bond investor most likely to realize an annualized rate of return greater than the bond's yield to maturity on the date of
purchase? After the investor buys the bond, market interest rates:

A) increase, and the investor holds the bond to maturity.

B) decrease, and the investor holds the bond to maturity.

C) decrease, and the investor sells the bond prior to maturity.

Question #37 of 40 Question ID: 1220495

Allison Coleman, CFA, owns a bond portfolio that includes Bond X, a callable bond with ten years to maturity that is callable at
any time beginning one year from today. Coleman's portfolio also includes Bond Y, a noncallable security with ten years to
maturity that carries the same credit rating as Bond X. Coleman expects interest rates to decrease steadily over the next few
years. Based on this assumption, Coleman should expect that:

A) Bond Y will experience a larger decrease in value than Bond X.

B) Bond X will benefit from positive convexity as rates decline.
C) the option embedded in Bond X will increase in value.

Question #38 of 40 Question ID: 1220487

Six-month LIBOR is an interest rate which:

A) represents the interest rate paid on a six-month loan from one bank to another.
B) is the return available on the shortest term euro-denominated securities.
C) is determined by adding a small spread to the yield available on a UK government bond
maturing in 6 months.

Question #39 of 40 Question ID: 1220497

Chris South owns $25,000 face value of Bradco bonds, which have a 7% coupon, pay interest semiannually, and have six years
remaining until maturity. The bonds are callable at par. The bonds were rated A when Chris bought them at par two years ago,
and they are currently worth $26,225, with a rating of AA. Over this 2-year period, the Bradco bonds have experienced a(n):

A) decrease in call risk.

B) increase in liquidity risk.
 C) decrease in credit risk.

Question #40 of 40 Question ID: 1220490

An analyst is evaluating an annual-pay bond with a yield to maturity of 7.0%. The yield of this bond on a semiannual-bond basis
is:

A) equal to 7.0%.
B) less than 7.0%.
C) greater than 7.0%.