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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1041:

  Level ________ verification applies to the firm.

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

  ---

  Explanation

  Level I verification applies to all firm composites. Level II verification requires a Level I verification at least on the specific composites being verified at Level II. (Note: There are only two levels of verification.)

• Question 1042:

  An analyst is attempting to value shares of a Clay Industries, and has solicited the help of a senior financial analyst. During their conversation, the senior financial analyst provides the following information about Clay Industries:

  Required rate of return on the bank's equity: 13. 50% per year Free cash flow to equity multiple at t4: 21

  2,000,000 shares outstanding

  Additionally, the analyst has obtained the following estimates of free cash flow to equity over the next five years:

  Year 1: $3,500,000 Year 2: $3,750,000 Year 3: $3,400,000 Year 4: $4,000,000 Year 5: $4,150,000

  Using this information, what is the value per share of this Clay Industries' shares according to the Free Cash Flow to Equity Model?

  A. $34. 02
  B. None of these answers is correct.
  C. $23. 78
  D. $29.60
  E. $21.34
  F. The answer cannot be calculated from the information provided.
  D. $29.60

  ---

  Explanation

  When determining the value of a common stock using the free cash flow to equity model, it is necessary to determine three things:

  1. The required rate of return on equity investments.

  2. The estimated free cash flow to equity multiple at time "k."

  3. The estimated free cash flows figures for the time periods leading up to "k."

  In this example, the calculation must begin with the discounting the free cash flow to equity figures for each of the four years provided. These figures are discounted each period by the required return on equity investments, and the final

  answer is converted to a per-share basis. This process is illustrated below:

  Year 1: ($3. 500,000 / 1.135) / 2,000,000 shares outstanding = $1.54

  Year 2: [$3,750,000 / (1.135)(1.135)] / 2,000,000 shares outstanding = $1.46

  Year 3: [$3,400,000 / (1.135)(1.135)(1.135)] / 2,000,000 shares outstanding = $1.16

  Year 4: [$4,000,000 / (1.135)(1.135)(1.135)(1.135)] / 2,000,000 shares outstanding = $1.21

  Year 5: [$4,150,000 / (1.135)(1.135)(1.135)(1.135)(1.135)] / 2,000,000 shares outstanding = $1.10

  Now that the free cash-flow-to-equity figures have been discounted and converted to a per-share basis, the next step in the valuation process is to determine the value of the final cash flow, which is defined as:

  [(Free cash flow to equity multiple * Final free cash flow) / (1 + r)(1+r)...(1 + k)]

  In the body of this question, we were given the anticipated multiple of free cash to equity that shares of Intelligent Semiconductor will sell for at time period: specifically, 21 times. Imputing this information into the terminal cash flow equation

  will yield the following:

  {[21 * ($4,150,000 / 2,000,000 shares outstanding)] / [(1.135) (1.135)(1.135)(1.135)(1.135)]} = $23. 13.

  Adding the answers from step 1 to the final year cash flow will yield the following:

  Value of Intelligent Semiconductor = [$1.54 + $1.46 + $1.16 + $1.21 + $1.10 + 23. 13] = $29.60 per share.

• Question 1043:

  What is the proportion of the total area under the normal curve within plus and minus two standard deviation?

  A. 68%
  B. 95%
  C. 99.7%
  D. None of these answers are correct
  E. 34%
  B. 95%

  ---

  Explanation

  95% of the area under the curve lies within plus and minus one standard deviation of the mean.

• Question 1044:

  An analyst is considering buying a call option on ZXC stock, which is currently trading at $33. 75 per share. Three month call options with a strike price of $30 are trading at a premium of $4. 50. Identify which of the following statements is most likely true regarding the ZXC call options.

  A. The ZXC call options are currently out of the money.
  B. The breakeven underlying price for ZXC stock is $38.25 per share.
  C. The potential upside of the ZXC call options is unlimited.
  C. The potential upside of the ZXC call options is unlimited.

  ---

  Explanation

• Question 1045:

  If you owe $2,000 today and pay for it by making 20 monthly payments with the first payment made immediately (today), what is the size of this monthly payment, if interest accrues at 7% per year, compounded monthly?

  A. $193. 55
  B. $191.63
  C. $209.48
  D. $105. 62
  E. $106. 24
  D. $105. 62

  ---

  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 20 N, 7 divide 12 = I/Y, 2000 PV, 0 FV, CPT PMT. 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 20 n, 7 ENTER 12 divide i, 2000 PV, 0 FV, PMT. 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 1046:

  An unanticipated shift to a more expansionary monetary policy will most likely cause

  A. depreciation in the exchange rate of the nation's currency, higher real interest rates and an inflow of capital.
  B. appreciation in the exchange rate of the nation's currency, higher real interest rates and an inflow of capital.
  C. appreciation in the exchange rate of the nation's currency, lower real interest rates and an outflow of capital.
  D. depreciation in the exchange rate of the nation's currency, lower real interest rates and an outflow of capital.
  D. depreciation in the exchange rate of the nation's currency, lower real interest rates and an outflow of capital.

  ---

  Explanation

  An unanticipated expansionary monetary policy will increase economic growth, accelerate in the inflation rate and lower real interest rates. These factors lead to an decrease in the demand for the nation's exports and assets and consequently a decrease in the demand for the nation's currency. This serves to cause the currency to depreciate. Lower real interest rates cause a capital outflow because investors liquidate their assets in search of a higher yield abroad.

• Question 1047:

  Each of the following transactions has the effect of reducing retained earnings except ________.

  A. cash dividends
  B. stock splits
  C. stock dividends
  D. dividends in kind
  B. stock splits

  ---

  Explanation

  Stock splits have no effect on retained earnings. They are simply a redistribution of the same equity of the company but with a different number of outstanding shares.

• Question 1048:

  When an analyst would like to estimate the earnings-per-share for a stock market series, her analysis would likely begin with which of the following activities?

  A. Analyzing competitive pressures within the series
  B. Formulating a composite of depreciation and amortization figures for the series
  C. Estimating the profit margin of the series
  D. Estimating the tax rate for the series
  E. Estimating the sales-per-share of the series
  E. Estimating the sales-per-share of the series

  ---

  Explanation

  When an analyst is trying to determine the EPS for a stock market series, the following series of steps represent the preferred method:

  Step 1: Estimate sales-per-share for the series Step 2: Estimate the operating profit margin for the series Step 3: Estimate the depreciation-per-share for the series for the next year Step 4: Estimate the interest expense-per-share for the next year Step 5: Estimate the corporate tax rate for the next year

  These steps will lead to an EPS figure, which can be multiplied by the appropriate earnings multiplier (i.e. the price-to-earnings ratio) to determine the ending price for the stock market series.

• Question 1049:

  Consider two individuals, David Lywie and Julio Stromek who have requested advice on their investment policy statements. Lywie is mid-career, has very little insurance coverage, and has fairly low job-related income expectations. In contrast, Stromek has fairly high net worth and long-term job-related earning potential. Which of the following statements is most likely correct?

  A. Lywie has higher risk tolerance than Stromek.
  B. Stromek has higher risk tolerance than Lywie.
  C. Stromek and Lywie have equivalent levels of risk tolerance.
  B. Stromek has higher risk tolerance than Lywie.

  ---

  Explanation

• Question 1050:

  If a distribution is right skewed, which of the following is/are true?

  I. It cannot be normally distributed.

  II. Its skewness is negative.

  III. It has a positive mean.

  IV.

  Large positive deviations dominate large negative deviations.

  A. I only
  B. I and IV
  C. II only
  D. I and III
  E. III only
  F. I, II, III and IV
  B. I and IV

  ---

  Explanation

  A normal distribution is symmetrical and hence, has zero skewness i.e. it is neither positively nor negatively skewed. If the distribution is right skewed, its skewness is positive but it does not necessarily have a positive mean.