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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1011:

  Which of the following statements is true?

  A. Standard I sets forth minimum standards relating to general activities.
  B. All of these statements are correct.
  C. Members are to be aware of laws and regulations of foreign jurisdictions.
  D. Standards II through V address specific conduct.
  E. Members who work in a country where the Code and Standards impose a lesser degree of responsibility than local laws and regulations must adhere to the local laws and regulations.
  F. Members are to comply with the laws and regulations of foreign jurisdictions.
  B. All of these statements are correct.

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  Explanation

  All the statements are true. Standard I contains principles that apply to the general activities of members while Standards II-V address specific conduct. In addition to complying with the requirements of the Code and Standards, members must be aware of laws and regulations of foreign jurisdictions. When the Code and Standards impose a higher degree of responsibility than applicable securities laws, members must adhere to the Code and Standards and vice-versa.

• Question 1012:

  Flavortech Inc. expects EBIT of $2,000,000 for the coming year. The firm's capital structure consists of 40 percent debt and 60 percent equity, and its marginal tax rate is 40 percent. The cost of equity is 14 percent, and the company pays a 10 percent rate on its $5,000,000 of long-term debt. One million shares of common stock are outstanding. In its next capital budgeting cycle, the firm expects to fund one large positive NPV project costing $1,200,000, and it will fund this project in accordance with its target capital structure. If the firm follows a residual dividend policy and has no other projects, what is its expected dividend payout ratio?

  A. 0%
  B. 40%
  C. 60%
  D. 100%
  E. 20%
  E. 20%

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  Explanation

  EBIT$2,000,000

  -I500,000 ($5,000,000 debt x 10% coupon)

  EBT1,500,000

  -Taxes600,000 ($1,500,000 EBT x 40% tax rate)

  NI900,000

  Project funding $1,200,000 project funded:

  Residual earnings 0.60 equity = $720,000

  0.40 debt = $480,000

  Payable as dividends: 900,000 - 720,000 = $180,000

  Dividend payout ratio = $180,000/$900,000 = 20%.

• Question 1013:

  Stromburg Corporation makes surveillance equipment for intelligence organizations. Its sales are $75,000,000. Fixed costs, including research and development, are $40,000,000, while variable costs amount to 30 percent of sales. Stromburg plans an expansion which will generate additional fixed costs of $15,000,000, decrease variable costs to 25 percent of sales, and also permit sales to increase to $100,000,000. What is Stromburg's degree of operating leverage at the new projected sales level?

  A. 3. 50
  B. 3. 33
  C. 4. 67
  D. 4. 20
  E. 3. 75
  E. 3. 75

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  Explanation

  Calculate DOL using new sales, new variable cost percentage, and new fixed costs: (In millions) DOL(S) = S-VC/S-VC-FC = $100-$25/($100-$25-$55) = 3. 75.

• Question 1014:

  Ace Consulting, a corporate finance consulting firm, is examining the operating performance of Microscam Incorporated. In their analysis, Ace Consulting has identified the following information: Year 1 interest paid $28,000 Year 2 interest paid $35,000 Year 1 sales $1,675,000 Year 2 sales $1,895,000 Year 1 EBIT $750,000 Year 2 EBIT $987,500 Cost of debt 7. 70% Given this information, what is the Degree of Operating Leverage for this firm during the time period in question?

  A. 1.531
  B. 2. 431
  C. The Degree of Operating Leverage cannot be calculated due to the fact that an appropriate discount rate has not been provided.
  D. 2. 412
  E. 2. 618
  F. 0.415
  D. 2. 412

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  Explanation

  To calculate the degree of operating leverage, use the following equation: {% change in EBIT/% change in sales}. In this example, neither the percentage change in sales, neither the percentage change in EBIT are provided, and must be calculated manually. To calculate the percentage change in sales, use the following equation: {[sales in year 2 - sales in year 1]/sales in year 1}. Incorporating the given information into this calculation yields a % change in sales of 13. 13%. To calculate the percentage change in EBIT, use the same equation as follows: {[EBIT in year 2 - EBIT in year 1]/EBIT in year 1}. Incorporating the given information into this calculation yields a percentage change in the EBIT of 31.67%. Finally, to calculate the Degree of Operating Leverage, divide the percentage change in EBIT by the percentage change in sales, which derives a DOL of 2. 412. The "interest paid" information is irrelevant in the calculation of the DOL, rather is incorporated into a determination of the Degree of Financial Leverage. This information has been provided to trick you. Additionally, the Degree of Operating Leverage can be calculated regardless of whether an appropriate discount rate has been provided or not.

• Question 1015:

  What would be indicative of a high-growth industry?

  A. A relatively low payout ratio.
  B. A relatively high debt-to-equity ratio.
  C. All of these answers are correct.
  D. A relatively low return on assets ratio.
  E. A relatively low return on equity ratio.
  F. None of these answers.
  A. A relatively low payout ratio.

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  Explanation

  In order to sustain a high rate of growth in earnings and dividends, a firm will needfinancing and if a large cash dividend is paid, it gives up one source of financing. Theresult being low payout of dividends for these high-growth companies.

• Question 1016:

  Monserrat Troy is a portfolio analyst at Merryl Flynch Inc., a leading investment bank. Merryl's corporate policy prohibits its employees from trading in IPOs even if they are not being underwritten by Merryl. Recently, a fast-growing internet firm, Netblaze, announced that it was going public. Monserrat's friend, Victor, told her that he could get her bid in for a few shares of the IPO. The size of the deal was very small, amounting to less than a couple of thousand dollars. Monserrat went ahead and bought the shares but did not think it was necessary to inform her supervisor about it. She:

  A. violated Standard II (B) - Professional Misconduct - by violating company policy.
  B. did not violate the AIMR code of conduct even though she violated the company policy since the size of her transaction was extremely small.
  C. violated Standard III (B) - Duty to Employer - by violating company policy.
  D. violated Standard III (C) - Disclosure of Conflicts to Employer - by violating company policy.
  D. violated Standard III (C) - Disclosure of Conflicts to Employer - by violating company policy.

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  Explanation

  Merryl's policy is designed to prevent any conflicts or even appearances of conflicts of interest when its employees trade in capital markets. If Monserrat wants to trade in a particular IPO, she needs to obtain special permission from Merryl's Compliance department (and such permission may or may not be granted by Compliance). Without such an exception, Monserrat's behavior is a violation of Standard III(C) - Disclosure of Conflicts to Employer. Note that Standards II (B) and III (B) do not apply to this situation.

• Question 1017:

  Which of the following will result in an insider trading prosecution?

  I. A tippee trades based on inside information, not knowing that the source of the information has actually received the information illegally and has breached fiduciary duty to the shareholders by leaking it. He has no reasons to suspect such a behavior.

  II. A corporate outsider who has absolutely no connections to any of the insiders misappropriates inside information and trades for profit based on that information.

  III.

  A tippee trades based on inside information about an impending tender offer after verifying that the source of the information has not breached any fiduciary duty to the company.

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

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  Explanation

  A "Tippee" is any person who learns inside information from a corporate insider. A tippee can be held liable under SEC's section 10b and rule 10(b)-5 only if he knows or should know that the insider has behaved improperly and breached fiduciary duty in revealing the information. Otherwise, the tippee is not held responsible for insider trading. One exception to this rule is information about tender offers, in which tippee liability results automatically under SEC Rule 14e-3, even if the insider has not breached any fiduciary duty. Under the Misappropriation Theory of insider trading, a person who misappropriates inside information and trades or abets trading in it is committing securities fraud and can be so charged, even if the person is a complete corporate outsider. The Topical Study, "Insider Trading," is probably the most important (and the trickiest) section in the handbook and you can expect at least one question from it.

• Question 1018:

  When the Percentage of Sales method is used, the estimated bad debt expense is calculated by:

  A. multiplying net sales on account times the percentage
  B. multiplying total sales on account times the percentage
  C. subtracting the percentage of net sales on account from the balance of Allowance for Uncollectible Accounts
  D. dividing total sales on account by the percentage
  A. multiplying net sales on account times the percentage

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  Explanation

  This method bases the period adjustment on a percent of net sales on account for the period.

• Question 1019:

  Gus McCray, CFA, went long one oil futures contract at a price of SI 10 on Monday. Oil closed at $115 on Wednesday, and the contract expired on Thursday with oil at $117. To maximize his gain, McCray should:

  A. have closed out his position by selling one oil futures contract close to expiration.
  B. have accepted cash settlement on his long position.
  C. be indifferent between closing out his position by selling the contract and accepting cash settlement.
  C. be indifferent between closing out his position by selling the contract and accepting cash settlement.

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  Explanation

• Question 1020:

  Stock dividends have the greatest impact on which section of the balance sheet?

  A. total assets
  B. total stockholders' equity
  C. total assets and total stockholders' equity
  D. retained earnings
  E. the components of stockholders' equity
  E. the components of stockholders' equity

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  Explanation

  The effect of stock dividends is recorded by transferring part of the retained earnings to the contributed capital accounts. Because of the increase in contributed, it is often described as capitalizing retained earnings.