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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 101:

  According to FASB, initial franchise fees should be recognized as income when

  A. the franchisee shows the ability to pay the fee.
  B. the franchisor has substantially performed or satisfied all material services and conditions.
  C. the franchisor has collected the majority of fee in cash.
  D. the franchisor bills the franchisee.
  B. the franchisor has substantially performed or satisfied all material services and conditions.

  ---

  Explanation

  Accounting and reporting standards for franchisors require that revenue be recognized when the franchisor has substantially performed or satisfied all material services and conditions.

• Question 102:

  Dilutive warrants are ________ included in the calculation of Diluted EPS.

  A. never
  B. often
  C. always
  D. sometimes
  C. always

  ---

  Explanation

  Diluted EPS reflects all securities that are potential shares and which decrease earnings per share. Also remember that all anti-dilutive securities are ignored. A dilutive security, by definition, is one that decreases EPS. Therefore, dilutive warrants are always included in the calculation of Diluted EPS.

• Question 103:

  Steffanie Graff is an investment advisor with Wimbledon Advisors, Inc. She recently obtained her CFA charter, reflected on her new business cards. In a meeting, she told a couple of her new clients something to the effect of the following: "I have a long record of successful investment advises, which have led my client accounts to have an annual return of 32% over the past 3 years. I am sure you will be quite satisfied with my performance." In reality, a large part of this return was caused by a very lucky coincidence wherein one of the penny stocks in a client account registered a 200% increase over a short time due to a takeover. Without this, her client accounts would have averaged less than SandP500 on a risk-adjusted basis. Has Stephanie violated the code of ethics?

  A. Yes, because she has misused her CFA charter to imply superior performance.
  B. Yes, because the statements misrepresent her track record.
  C. Yes, since her presentation of her own performance is in violation of the AIMR-PPP.
  D. No, because the statements are factual and she has not promised any future returns.
  B. Yes, because the statements misrepresent her track record.

  ---

  Explanation

  Standard IV (B.6) - Prohibition against Misrepresentation.

• Question 104:

  Standard III includes which of the following?

  A. None of these answers
  B. Use of Professional Designation
  C. Disclosure of Conflicts to Employer
  D. Fair Dealing
  E. Prohibition against Plagiarism
  F. All of these answers
  C. Disclosure of Conflicts to Employer

  ---

  Explanation

  Standard III deals with Obligation to Inform Employer of Code and Standards, Duty to Employer, Disclosure of Conflicts to Employer, Disclosure of Additional Compensation Arrangements and Responsibilities of Supervisors.

• Question 105:

  "Sampling error" refers to:

  A. an incorrect selection of a sampling method.
  B. the standard error of the normal deviates of a sample drawn from a population.
  C. the difference between a sample statistic and the corresponding population parameter.
  D. an incorrect usage of a sampling method.
  C. the difference between a sample statistic and the corresponding population parameter.

  ---

  Explanation

  Sampling error is the difference between the population's actual parameter and the parameter estimate that results from analysis of the sample.

• Question 106:

  According to U.S. GAAP, the format of the income statement

  A. must include footnotes which detail particular income statement sections.
  B. must not vary across different industries.
  C. must include an "operating expenses" section.
  D. must be identical in the reporting of equity in earnings of affiliates.
  E. is not specified.
  E. is not specified.

  ---

  Explanation

  U.S. GAAP do not specify the format of the income statement. Actual formats vary across firms, especially in the reporting of equity in earnings of affiliates, and nonoperating income and expense.

• Question 107:

  Davis Corporation is faced with two independent investment opportunities. The Corporation has an investment policy, which requires acceptable projects to recover all costs within 3 years. The Corporation uses the discounted payback method to assess potential projects and utilizes a discount rate of 10 percent. The cash flows for the two projects are: Time Project A Project B 0-100,000-$80,000 140,000 50,000 240,000 20,000 340,000 30,000 430,000 0 Which investment project(s) does the company invest in?

  A. Project B only.
  B. Project A only.
  C. Neither Project A or Project B.
  D. Project A and Project B.
  A. Project B only.

  ---

  Explanation

  The sum of the PVs of the t = 1, t = 2, and t = 3 cash flows at t = 0 for Project A is $99,474. 08. Thus, the discounted payback period of Project A exceeds 3 years and Project A is not acceptable. The PVs of the t = 1, t = 2, and t = 3 cash flows at t = 0 for Project B are $45,454. 55, $16,528.93, and $22,539.44, respectively. These PVs sum to $84,522. 92, which is greater than the cost of the project, indicating that the discounted payback period is less than 3 years. Thus, Project B will be undertaken.

• Question 108:

  Common stocks of good companies may not be good investments because:

  I. The stocks may be overpriced compared to other stocks with similar risks.

  II. Empirically, stocks which have performed well in the past tend to produce lower-than-expected returns in the future.

  III.

  Good companies frequently happen to be large stocks which are low risk and do not provide very high rates of return.

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

  ---

  Explanation

  Even if a company is good, the market could temporarily elevate the price above that consistent with its risk. In that case, the stock is overpriced and it may not make sense to buy it, though that decision still must be based on a portfolio diversification context.

• Question 109:

  The ________ approach begins with the current earnings multiplier and estimates the direction and extent of a change in the specific factors affecting dividend payout, required rate of return and growth rate of dividends.

  A. specific estimate
  B. current earnings
  C. direction of change
  D. gross magnitude
  C. direction of change

  ---

  Explanation

  There are two ways to estimate the earnings multiplier: (1) Direction of change approach and (2) Specific estimate approach. The first focuses on change and change direction, while the other focuses on scenario-based estimates.

• Question 110:

  Lascheid Enterprises is an all-equity firm with 175,000 shares outstanding. The company's stock price is currently $80 a share. The company's EBIT is $2,000,000 and is expected to remain constant over time. The company pays out all of its earning each year--so its earnings per share equals its dividends per share. The firm's tax rate is 30 percent. The company is considering issuing $800,000 worth of bonds and using the proceeds for a stock repurchase. If issued the bonds would have an estimated yield to maturity of 8 percent. The risk-free rate is 5 percent and the market risk premium is also 5 percent. The company's beta is currently 1.0, but its investment banker's estimate that the company's beta would rise to 1.2 if they proceeded with the recapitalization. What would be the company's stock price following the repurchase transaction.

  A. $102. 63
  B. $106. 67
  C. $77. 14
  D. $74. 67
  E. $70.40
  D. $74. 67

  ---

  Explanation

  The bonds used in the repurchase will create a new interest expense for the company. This will change net income. Dividends per share will change because net income changes and the number of shares outstanding changes.

  New interest expense: $800,000 x 8% = $64,000.

  New net income: ($2,000,000 - $64,000)(1 - 0.3) = $1,355,200.

  Shares repurchased: $800,000/80 = 10,000 shares.

  New shares outstanding: 175,000 - 10,000 = 165,000 shares.

  New dividends per share: $1,355,200/165,000 = $8.21. We must also calculate a new cost of equity: 5% + (5%)1.2 = 11%.

  New stock price: $8.21/11% = $74. 67.