# Thread: Free CFA Level 1 practice question bank for June 2011 exam

1. Q 75 Ans B:

Under both IFRS and US GAAP, debt with warrant should be considered as debt and equity and hence the proceeds from the issue should be divided between equity and debt portion in the balance sheet, this result in lower debt to equity ratio.

Under US GAAP, a convertible bond should be treated like vanilla bond issue and all the proceeds should go to debt. However in IFRS a convertible bond should be treated as a mixture of debt and equity issue and hence has the same effect as that of debt with warrant.

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q 76 Company A issues a bond at premium (that is the coupon rate is more than the market interest rate). The coupon rate is 10% per annum and the market interest rate is 9%. The tenure of bond is 5 years and face value is \$100,000, the coupon is paid annually. Find the book value of the bond

Options---------At time of issue-------------After One year
A--------------------\$103,889-------------------------\$103,239
B--------------------\$104,539-------------------------\$94,539
C--------------------\$103,889-------------------------\$93,899

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2. Q 76 Ans A:

Use TVM function to calculate
FV = 100,000 ; PMT = 10,000 ; I/Y = 9; N = 5; CPT -> PV = 103,889

In the first year coupon paid = 10,000;
interest expense = book value * market rate at the time of issuance = 103,889 * 0.09 = 9350
Bond premium amortization = 10,000 – 9350 = \$650
Book value at end of year = book value at beginning – bond premium amortization
103,889 - \$650 = \$103,239

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q 77. Which of the following bonds have highest cash flow from financing at the time of issuance, assume that the face value is same for all the bonds and they have the same maturity?

B) Zero Coupon Bond
C) Discount Bond

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3. Q.77 a

4. Q 77 Ans A:

At the time of issuance the entire bond proceed should be treated as CFF, therefore the premium bonds will have the highest CFF as the maximum amount is raised in such bond.

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q 78 Firm X was accounting a lease as operating lease but the lessor has now given the bargain purchase option to X so it will recognize the lease as capital lease. What impact this will have on the operating profit of X?

A. Increase
B. Decrease
C. No Impact

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5. Q 78 Ans A:

Operating lease expenses decreases the operating profit. In capital lease we recognize interest expense and lease expense, both of which are not considered as operating expense and hence operating profit will increase.

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Today's Question (Questions and answers provided by Knowledge Varsity)
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Q 79. A firm is leasing equipment, the lease payments are \$20,000 and the lease is for 5 years. The management is contemplating on whether to consider a lease as operating lease or capital lease. The management wants to increase the net profit of the firm for this particular year only, which type of lease would help the management achieve its goal. Assume if the lease is a capital lease then the asset life is 5 years and salvage value is zero, discount rate is 10%.

A. Operating Lease
B. Capital or financing lease
C. It doesn’t matter which lease method is chosen

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6. Q 79 Ans A:

Operating lease increases the net profit in the initial years.

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q 80. A project has a very short payback period but a negative net present value. Which of the following best describes the action that should be taken?

A The project should be rejected
B The project should be accepted only if the company has limited funds for investment
C The project should be accepted only if it is necessary for some mandatory regulatory requirements

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7. Q 80 Ans C:

When the NPV is negative then we should only accept mandatory project.

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q 81 A project requires an initial cash outlay of \$75m. It was initially believed that this investment would create cash inflows of \$23 in each of the following three years, and \$12m in each of the next two years, after which the project would be complete. The payback period and internal rate of return of the project were calculated for the project. A further review of project cash flows indicated that the final cash flow in year five had been overestimated, and would probably be only \$4m. What effect would this have on the two calculations?

Options----------Payback period---------Internal rate of return
A------------------------Unchanged-----------------------Decrease
B------------------------Unchanged-----------------------Unchanged
C------------------------Increase--------------------------Decrease

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8. Ans 81 is C

9. Q81 Ans A:

Find the payback period for this project, it will be less than 4 years. Since the payback period is less than 4 years, the decrease in cash flow of 5th year does not impact the payback period. However internal rate of return will decrease.

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q82. An auto manufacturer is considering the introduction to the market of a new line of sedans that it expects to generate a profit of \$100 million a year. This new line will reduce sales on the manufacturer

10. Q 82 Ans B:

\$5 million is a sunk cost, \$15 million is a opportunity cost

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q 83 Which one of the following projects most likely does not have multiple IRRs?

Year--------------0-----------1------------2---------------3
Project A------- -100---------50-----------120------------ -50
Project B------- -100-------- 120----------- 50------------ -50
Project C------- -100--------- 50----------- 35------------- 35

A. Project A
B. Project B
C. Project C

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