CFA Institute CFA-LEVEL-1 Online Practice Questions and Exam Preparation

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 991:

  What is the present value of $50 per year for 10 years, with the first cash flow occurring today, rather than 1 year from now? Assume interest is 6% per year, compounded annually.

  A. $368.00
  B. $402. 55
  C. $390.08
  D. $357. 61
  E. $398.00
  C. $390.08

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  Explanation

  Recognize that this question is an annuity due situation, since the first cash flow occurs immediately or at the beginning of each period. Annuities where the first payment occurs 1 period from today (or at the end of each period) are called "ordinary" annuities. This requires placing the calculator into "Begin" mode prior to solving the question. NOTE: Be sure to place the calculator OUT OF annuity due mode after this question before going on to subsequent questions, or you will get the wrong answers! On the BAII Plus, press 2nd BGN. If the display shows END, then press 2nd SET and then 2nd Quit. This will place the BAII Plus into annuity due mode (you can tell this because the BAII Plus will display BGN in small letters). Now press 10 N, 6 I/Y, 50 PMT, 0 FV, CPT PV. Place the calculator back into End mode (for ordinary annuities) by pressing 2nd BGN and then if the calculator is displaying BGN, press 2nd SET and 2nd Quit. The BGN letters should disappear from the display. On the HP12C, press BlueShift END, which is the blue function on the front of the 8 digit key. This places the HP12C into Begin mode (the HP12C shows the word BEGIN in the display when in this mode). Then press 10 n, 6 i, 50 PMT, 0 FV, PV. To place the HP12C back into ordinary annuity mode (or END mode), press BlueShift BEG (the blue function written on the front of the 7 digit key). Note that the answer is displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 992:

  Which of the following statements about the implications of tests for the efficient market hypothesis (EMH) is FALSE?

  A. By purchasing an index fund, an investor can match the market return and minimize costs.
  B. Technical trading rules do not consistently provide excess returns after adjusting for trading costs and taxes.
  C. Other than corporate insiders and market specialists, most traders have monopolistic access to information, which rejects the strong-form EMH.
  D. The best way to measure the performance of investments professionals is against a randomly selected buy-hold strategy of stocks (assuming the same risk level).
  C. Other than corporate insiders and market specialists, most traders have monopolistic access to information, which rejects the strong-form EMH.

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  Explanation

  Other than corporate insiders and market specialists, no other group has monopolistic access to information, which supports the strong-form EMH. The other statements are true.

• Question 993:

  You are given a risk-free rate of 3% per year, a portfolio return of 8% per year, and a standard deviation of portfolio return of 22% per year. What is the Sharpe measure of risk-adjusted performance?

  A. 0.250.
  B. 0.234.
  C. 0.227.
  D. 0.222.
  C. 0.227.

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  Explanation

  The Sharpe measure of risk-adjusted performance is equal to (rbar_p - rbar_f)/sigma_p, where rbar_p is the mean portfolio return, rbar_f is the mean risk-free return, and sigma_p is the standard deviation of portfolio return. In our case, we

  have (8% - 3%) / 22% = 5/22 = 0.227.

• Question 994:

  A survey of 144 retail stores revealed that a particular brand and model of a VCR retails for $375 with a standard deviation of $20. What is the 99% confidence interval to estimate the true cost of the VCR?

  A. $328.40 to $421.60
  B. $323. 40 to $426. 60
  C. $335. 80 to $414. 20
  D. $335. 80 to $415. 20
  E. None of these answers
  B. $323. 40 to $426. 60

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  Explanation

  For 99%, the z value will be 2. 575. Therefore we have 375 +/- 2. 575*20.

• Question 995:

  A market survey was conducted to estimate the proportion of homemakers who could recognize the brand name of a cleanser based on the shape and color of the container. Of the 1,400 homemakers, 420 were able to identify the brand name. Using the 0.99 degree of confidence, the population proportion lies within what interval?

  A. 0.250 and 0.350
  B. 0.268 and 0.332
  C. 0.950 and 0.997
  D. 0.100 and 0.400
  E. None of these answers
  B. 0.268 and 0.332

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  Explanation

  Interval estimate can be found from p +/- z[p(1-p)/n]^0.5. Here we have n = 1400, p = 414/1400 = 0.3 and z = 2. 58 (for 99%). Therefore 0.3 +/- 2. 58*0.01225 and we get 0.268 and 0.332.

• Question 996:

  The Management Discussion and Analysis Section of the annual report ________.

  A. is optional but normally included in the annual report
  B. is required by the SEC only if the company has suffered from unfavorable trends or there are significant uncertainty concerning liquidity of the company
  C. is required by the SEC only if they have a qualified audit opinion
  D. is required by the SEC
  D. is required by the SEC

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  Explanation

  Companies with publicly traded securities have been required since 1968 to provide a discussion of earnings in the MDandA section.

• Question 997:

  An investment of $2,300 grows to $2,904 in 4 years. The annually compounded rate of return is:

  A. 6. 00%
  B. 6. 25%
  C. 5. 90%
  D. 6. 37%
  A. 6. 00%

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  Explanation

  Let r be the annually compounded rate. Then, 2904 = 2300*(1+r)^4. Hence, r = (2904/2300)^(1/4) - 1 = 6%

• Question 998:

  Assume that a firm has a degree of financial leverage of 1.25. If sales increase by 20 percent, the firm will experience a 60 percent increase in EPS, and it will have an EBIT of $100,000. What will be the EBIT for this firm if sales do not increase?

  A. $42,115
  B. $84,375
  C. $67,568
  D. $100,000
  E. $113,412
  C. $67,568

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  Explanation

  DTL = % change EPS/% change Sales = 60%/20% = 3. 0.

  DOL = DTL/DFL = 3. 0/1.25 = 2. 40.

  Old EBIT = $100,000/[1 + (0.20)(2. 40)] = $100,000/1.48 = $67,568.

  Alternate solution:

  Use DFL expression to calculate change in EBIT and previous EBIT:

  DFL = 1.25 = %change EPS/%change EBIT

  = 0.60/[change EBIT/($100,000 - change EBIT)]

  = [0.60($100,000) - 0.60(change EBIT)]/change EBIT

  1.25 change EBIT = $60,000 - 0.60(change EBIT)

  1.85 change EBIT = $60,000

  change EBIT = $32,432.

  Old EBIT = $100,000 - $32,432 = $67,568.

• Question 999:

  A firm uses LIFO for inventory costing. The beginning inventory balance of the firm was 700. During the period, it purchased inventory worth 320 and sold goods worth 270. The market value of the inventory at the end of the period was 650. The total inventory expense during this period was ________.

  A. 370
  B. 270
  C. 320
  D. 340
  A. 370

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  Explanation

  In this problem, you have to recognize the fact that inventory is valued at the end of an accounting period at the lower of cost or market (LCM). The write-down that occurs if the market value is lower than cost is charged to the income. In this case, the COGS equals 270 (given). If the LCM were ignored, the ending inventory would have been valued at 700 + 320 - 270 = 750. However, due to the lower market value of 650, inventory gets written down to 650 and the loss of 100 in inventory is charged to income. Thus, the total inventory expense equals 270 + 100 = 370.

• Question 1000:

  Which of the following would affect the comparability of accounting information for a given company from one accounting period to the next?

  I. Change in accounting principles

  II. Disposition of segment of business

  III. Acquisition of company accounted for using purchase accounting

  IV.

  Change in auditors

  A. I, III and IV
  B. I and III
  C. I, II and III
  D. I and II
  C. I, II and III

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  Explanation

  A change in the representation by an accounting firm has no material effect on the accounting information.