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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1191:

  Two events, A and B, are independent if:

  A. P(A and B) = 1
  B. P(A and B) = P(A) + P(B)
  C. P(A and B) = 0
  D. P(A and B) = P(A) P(B)
  D. P(A and B) = P(A) P(B)

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  Explanation

  This is the definition of independence.

• Question 1192:

  The multiplier effect is caused by

  A. government fiscal and monetary policy.
  B. government fiscal policy.
  C. government monetary policy.
  D. inflation.
  E. inflation and interest rates.
  B. government fiscal policy.

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  Explanation

  The multiplier effect is the effect government (fiscal) spending has on the broader economy. For example, a certain amount of spending on roads by the government increases demand for earthmoving equipment, concrete, and other items, causing firms that supply those items to themselves require more materials and employees. This results in the government's spending being amplified (or multiplied) beyond the amount that is directly spent.

• Question 1193:

  Under an inflationary, LIFO environment with stable inventories, which of the following is true compared to FIFO? Working Capital Taxes Current Ratio

  I. Higher Lower Lower

  II. Lower Lower Lower

  III. Higher Lower Lower

  IV.

  Lower Higher Higher

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

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  Explanation

  With rising prices and stable inventories, the COGS is higher under LIFO than under FIFO, thus lower net income and lower taxes. Ending inventory is valued lower under LIFO than under FIFO and hence, a lower current asset value and lower working capital and current ratio.

• Question 1194:

  A Japanese investor purchasing a U.S. government bond

  A. causes the yen to appreciate.
  B. creates a demand for yen and a supply of dollars in the foreign exchange market.
  C. causes the dollar to depreciate.
  D. creates a demand for dollars and a supply of yen in the foreign exchange market.
  D. creates a demand for dollars and a supply of yen in the foreign exchange market.

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  Explanation

  A foreigner must pay for a U.S. bond using U.S. dollars. Therefore, the investor must exchange Japanese yen on the foreign exchange market for U.S. dollars. This transaction increases the supply of Japanese yen and the demand for U.S. dollars.

• Question 1195:

  A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below: Years0123 S-1,1001,00035050 L-1,10003001,500 The company's cost of capital is 12 percent, and it can get an unlimited amount of capital at that cost. What is the regular IRR (not MIRR) of the better project, i.e., the project which the company should choose if it wants to maximize its stock price?

  A. 12. 00%
  B. 18.62%
  C. 20.46%
  D. 19.08%
  E. 15. 53%
  D. 19.08%

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  Explanation

  Because the two projects are mutually exclusive, the project with the higher positive NPV is the "better" project.

  S-1,1001,00035050

  NPV(S) = $107. 46

  IRR(S) = 20.46%

  L-1,10003001,500

  NPV(L) = $206. 83

  IRR(L) = 19.08%

  Project L is the "better" project: its IRR = 19.08%.

• Question 1196:

  Increasing which factor in the dividend discount model, without changing the other two, would be least likely to increase a stock's price-to-earnings (P/E) ratio?

  A. The expected dividend payout ratio.
  B. The required rate of return on the stock.
  C. The expected constant growth rate of dividends.
  B. The required rate of return on the stock.

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  Explanation

• Question 1197:

  Brock Brothers wants to maintain its capital structure, which is 30 percent debt, and 70 percent equity. The company forecasts that its net income this year will be $1,000,000. The company follows a residual dividend policy, and anticipates a dividend payout ratio of 40 percent. What is the size of the company's capital budget?

  A. $857,143
  B. $1,428,571
  C. $1,000,000
  D. $600,000
  E. $2,000,000
  A. $857,143

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  Explanation

  Since the company expects to pay out 40% of net income or $400,000, it must expect to have $600,000 of retained earnings available for capital investment. Given that the firm will finance new investment with 70% equity and 30% debt, $600,000 must represent 70% of the firm's capital budget, that is, $600,000 = (0.7)CB or CB = $857,143.

• Question 1198:

  In a classified balance sheet the following is always true:

  A. Current assets include only items that will be converted into cash within 1 year.
  B. Assets and liabilities are broken down as current and non-current.
  C. Current assets divided by current liabilities will equal working capital.
  D. All of these answers are true.
  B. Assets and liabilities are broken down as current and non-current.

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  Explanation

  A classified balance sheet always breaks down current and non-current assets and liabilities. Items defined as current assets are those that will be converted to cash or used in operations within one year or the operating cycle, whichever is longer. Current liabilities are obligations due during the same period. Current assets minus current liabilities is equal to working capital.

• Question 1199:

  A researcher has a sample of 900 observations from a population whose standard deviation is known to be 3,381. The mean of the sample is calculated to be 465. 2. The null hypothesis is stated as Ho: mean < 200. The p-value in this case equals ________.

  A. 1.54%
  B. 2. 26%
  C. 1.13%
  D. 0.94%
  D. 0.94%

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  Explanation

  To test the hypothesis, you need to calculate the smallest z-statistic since the null hypothesis is unidirectional and to the left. This makes it the hardest to reject the null and you should always use the most stringent criterion for rejecting the null. After all, the null is the hypothesis maintained to be true by default and only a sufficient weight of evidence should be used to reject that view. The smallest z-statistic under the null is calculated to be (465. 2 - 200)/(3381/(900^.5)) = 2. 35. The right-tailed probability of observing a z-statistic which is at least as big as 2. 35 equals 1.0 - 0.9906 = 0.0094 = 0.94%. This is the p-value of the right-tailed test in this sample.

• Question 1200:

  When analyzing the balance sheet, which of the following is an argument against using LIFO in times of rising prices?

  A. Neither of these answers is correct.
  B. Both of these answers are correct.
  C. Under LIFO, ending inventory will be overstated.
  D. Under LIFO, ending inventory is valued at the oldest prices, an unrealistic valuation.
  D. Under LIFO, ending inventory is valued at the oldest prices, an unrealistic valuation.

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  Explanation

  LIFO values ending inventory at the oldest prices, thus in times of rising prices, inventory will be understated. This results in reporting an unrealistic valuation of the company's inventory.