# Thread: Free CFA Level 1 Practice Questions for December 2012 exam

1. Ratan Sir, can we have videos also as the solutions. It really helps in understanding & approach for problem solving.

@Bimupa :- Thanks.

Regards,
Shubhojit

2. Answer for Q17 shud be 'C'.

@Bimupa:- I agree with u !!

3. ## Solution to Question #16

Solution to Question #16
Text Solution to Question #16

There are several methods to find out the weighted average, we will adopt a simple approach.
The share outstanding on Jan 1 should be considered for the entire year.
The share issued on Apr 1, is only applicable for 9 months (prospectively)
The stock dividend on Jul 1, should be applied retrospectively. Note, that the stock dividend will increase the number of shares outstanding before the stock dividend date, it is not applicable for stocks issued or repurchased after the stock dividend date.
The share repurchased on Sep 1, should be subtracted, but only for 4 months (prospectively)
Please, see the following table

What we do next is add the last column
=> Sum = 12 *11,000 + 9 *4,400 + 4 * -1,000 = 132,000 + 39,600 â€“ 4,000 = 167,600
Now, divide this sum by 12 (since we multiplied them by the months earlier)
=> 167,600/ 12 = 13,967
=> So, the weighted average share = 13,967

Regards,
Ratan Gupta
Director, Knowledge Varsity
www.KnowledgeVarsity.com

Originally Posted by ratankv
Today's Question (Questions and answers provided by Knowledge Varsity)
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Q16. During the past year a company had the following changes in the capital structure
Jan 1: Share outstanding: 10,000
Apr 1: Share issued: 4,000
Jul 1: 10% stock dividend
Sep 1: Shares repurchased: 1,000
The weighted average no of common stock in the last year is most likely (take January to December as the financial year)
A. 13,600
B. 13,967
C. 14,400

4. ## Solution to Question #17

Text Solution to Question #17

First determine, if the option is dilutive or anti-dilutive
The option will be dilutive, only when the average stock price > exercise price;
here we have average stock price is \$30, which is more than the exercise price; hence the option is dilutive
If the option is exercised, calculate the amount of money received by the firm. Note that the firm will get only the exercise price
= 10,000 * \$20 = \$20,000
To reduce the dilution, the firm uses this money to buy the stocks in the market at an average stock price.
So, the number of stocks bought = 20,000/30 = 6,666.67
Rounding to the whole number it comes to 6,667
Since, firm buys the share, the net increase in the number of shares is less
=> 10,000 – 6,667 = 3,333
So, 3333 number of shares has increased.

Simpler method,
Increase in no of shares = (Average stock price – exercise price)/(average stock price) * Number of options
=> Increase = {(30-20)/30 } *10,000 = 3,333

Regards,
Ratan Gupta
Director, Knowledge Varsity
www.KnowledgeVarsity.com

Originally Posted by ratankv
Today's Question (Questions and answers provided by Knowledge Varsity)
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Q17. A firm had 10,000 options outstanding exercisable at \$20 last year.
If the average market price of the firm’s share was \$30, find the increase in the number of shares for diluted EPS calculation attributed to the options.
A. 10,000
B. 6,667
C. 3,333

5. ## Question #18

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

Question #18 A firm has net income of \$100,000 in 2011 and 10,000 common share outstanding for the entire year. The firm has 100 non-convertible preferred shares paying 12% dividend and having face value \$100. The firm also has 100 convertible preferred shares paying 10% and having face value \$100. Each of the convertible preferred shares is convertible to 5 shares. The diluted EPS in 2011 is closest to?
A. \$9.78
B. \$9.41
C. \$9.52

6. I am assuming that all get converted. So the denominator will have the no. of shares outstanding with full dilution.
Ans. of Q.18: C

7. Originally Posted by ratankv
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Today's Question (Questions and answers provided by Knowledge Varsity)

Question #18 A firm has net income of \$100,000 in 2011 and 10,000 common share outstanding for the entire year. The firm has 100 non-convertible preferred shares paying 12% dividend and having face value \$100. The firm also has 100 convertible preferred shares paying 10% and having face value \$100. Each of the convertible preferred shares is convertible to 5 shares. The diluted EPS in 2011 is closest to?
A. \$9.78
B. \$9.41
C. \$9.52
What is the answer to question 18?

8. I guess that the answer for Q 18 shud be 'A'.

Ratan Sir:- Plz share the answer for Q-18. Also, we r looking for new questions as well.

9. CFA is a Finance course and this course enables a student how to invest in a firm, how to maintain or increase your return, how to be tax efficient etc. The person having CFA degree can judge where to invest and how to find out the value of company.

10. When an investment managerâ€™s client instructs the manager to use the clientâ€™s brokerage to purchase goods or services for the client, this is known as;

A. Horizontal brokerage and does not violate any fiduciary duty
B. Directed brokerage and does not violate any fiduciary duty
C. Straight brokerage and does not violate any fiduciary duty

Answer: B

Explanation
It is known as directed brokerage and does not violate any fiduciary duty, because brokerage is an asset of the client and the brokerage is used to benefit that client, not the manager, such practice does not violate fiduciary duty.

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