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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1201:

  A financial analyst with Smith, Kleen and Beetchnutty is examining shares of a publicly-traded specialty brewer. Assume the following information:

  EPS: $1.83

  ROE: 19.00%

  Growth rate of dividends: 10.85%

  Discount rate: 12. 50%

  Tax Rate 35%

  Using this information, what is the dividend payout ratio for this specialty brewer? Further, what is the annual dividend?

  A. 50.76%, $0.93
  B. The answer cannot be determined from the information provided.
  C. 42. 90%, $0.79
  D. 38.13%, $0.70
  E. 57. 11%, $1.05
  F. 42. 90%, $1.05
  C. 42. 90%, $0.79

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  Explanation

  To determine the dividend payout ratio, the equation used to determine the growth rate of dividends must be manipulated. This equation is originally structured as follows:

  {g = ROE (1 - Dividend Payout Ratio)}

  In order to determine the Dividend Payout Ratio, the equation must be rearranged to the following: {(1 - Dividend Payout Ratio) = Growth Rate of Dividends / ROE}.

  Imputing the given information into this equation will yield:

  {(1 - Dividend Payout Ratio) = 0.1085/0.19)} = 0.57105

  Finally, subtracting this answer from 1 will yield the answer of 42. 90% for the dividend payout ratio. (Remember that the original answer, 0.57105, is the retention rate, not the dividend payout ratio). In order to determine the annual dividend,

  take the Dividend Payout Ratio, which was found to be 42. 90%, and multiply this figure by the Earnings Per Share calculation, which is given as $1.83. This will yield an annual dividend of $0.785

• Question 1202:

  Information is ________ until it has been disseminated to the marketplace in general and investors have had an opportunity to react to the information.

  A. none of these answers
  B. walled
  C. material
  D. inside
  E. nonpublic
  E. nonpublic

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  Explanation

  Standard V (A) deals with the responsibility of members when they are dealing with the receipt and disclosure of material, nonpublic information. Information is "nonpublic" until it has been disseminated to the marketplace in general and investors have had an opportunity to react to the information. Mere possession of material nonpublic information will trigger trading restrictions under Standard V (A).

• Question 1203:

  An internationally diverse group of students attending the London School of Economics has formed a Level 1 CFA Study Group. Three of the students (from Germany, Japan, and the U.S) are assigned the Portfolio Management Study Session reading on selecting global investments. As part of determining how changes in currency rates can affect returns on foreign investments, the group analyzes the return in the U.S. bond market from the late 1980s to the mid 1990s and ranks the U.S. bond market returns in the following three ways: 1- measured in each individual's home currency, 2- adjusted for exchange rate changes and expressed in U.S. dollar terms, and 3 ?on a risk adjusted basis. They summarized their results in the following table:

  *

  Rank is out of the set: Germany, Japan, and U.S.

  Following is a set of possible conclusions drawn from their results. Which of the statements is INCORRECT?

  A. Investors in different countries may earn different local currency returns even if they invest in the same investments.
  B. Even though the non-U.S. markets experienced higher returns over this period, the increased risk of the non-U.S. securities offset the higher return and lowered the return/risk ratio.
  C. The U.S. dollar strengthened during the time period observed.
  D. Foreign exchange rate effects can have negative impacts on investment returns.
  C. The U.S. dollar strengthened during the time period observed.

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  Explanation

  Since the U.S. Bond rank decreased when expressed in U.S. dollar terms, the U.S. dollar weakened over the time period observed. As the dollar weakens, a U.S. investor would earn higher returns on foreign investments because each unit of foreign currency buys more dollars. A foreign investor would also be able to earn higher returns in the U.S., as it would take less of a foreign currency to buy dollars.

• Question 1204:

  An automatic machine inserts mixed vegetables into a plastic bag. Past experience revealed that some packages were underweight and some were overweight, but most of them had satisfactory weight.

  Weight % of Total Underweight 2. 5 Satisfactory 90.0 Overweight 7. 5

  Three packages are selected from the food processing line. What is the probability of selecting and finding that all three of them are satisfactory?

  A. 0.900
  B. 0.075
  C. 0.729
  D. 0.810
  E. None of these answers
  C. 0.729

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  Explanation

  P(all three satisfactory) = 0.9*0.9*0.9 = 0.729.

• Question 1205:

  Which of the following firms has the highest degree of financial leverage? Firm A EBIT: $1,000,000 Interest Paid: $50,000 Total Operating Expenses: $900,000 Fixed Operating Expenses: $350,000 Firm B EBIT: $490,000 Interest Paid: $15,000 Total Operating Expenses: $300,000 Fixed Operating Expenses: $180,000 Firm C EBIT: $1,500,000 Interest Paid: $75,000 Total Operating Expenses: $3,000,000 Fixed Operating Expenses: $2,250,000 Firm D EBIT: $875,000 Interest Paid: $75,000 Total Operating Expenses: $3,000,000 Fixed Operating Expenses: $2,000,000 Firm E EBIT: $1,250,000 Interest Paid: $90,000 Total Operating Expenses: $2,900,000 Fixed Operating Expenses: $1,750,000

  A. Firm E
  B. Firm C
  C. Firm D
  D. Firm B
  E. Firm A
  C. Firm D

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  Explanation

  The Degree of Financial Leverage (DFL) measures the percentage change in EPS that results from a given percentage change in EBIT. Financial Leverage is the second component of total leverage, along with Operating Leverage. The equation used to calculate the Degree of Financial Leverage is as follows: {DFL = [EBIT/(EBIT - Interest Paid)]}. In this example, Firm D has the highest DFL, with a figure of 1.09375. Remember that the Degree of Financial Leverage can never be less than one, and can never be negative In a situation where the company under examination has zero interest expense, the DFL would be equal to one, i.e. the EBIT is equal to the EBIT minus the interest expense. Another important note to remember is that in calculating the Degree of Financial Leverage, dividend payments to preferred stockholders should be included in the interest expense figure. Operating expenses are not factored into the DFL calculation, rather are used in the determination of Operating Leverage.

• Question 1206:

  Which of the following is/are disadvantages of stock repurchases?

  I. If investors are not indifferent between dividends and capital gains, regular repurchase programs could drive them away.

  II. The IRS could tax the firm for improper accumulation of capital gains if it felt regular repurchase programs had taken the place of dividends.

  III.

  The firm might end up paying a higher than fair price if it commits to a repurchase program.

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

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  Explanation

  If shareholders are not indifferent between dividends and capital gains, the stock price might increase more with dividends. This is because cash dividends are generally made very regularly, while stock repurchases are irregularly made. Although this has been rarely done for public corporations, the IRS can impose a tax if it believes regular repurchases are being made to avoid paying dividends. If a company's shares are thinly traded, and the firm wishes to repurchase a large number of shares, it could bid up the stock price above the equilibrium price and overpay for the shares.

• Question 1207:

  According to the framework for real estate analysis, one determinant of value is supply. Which of following is not a subset of "supply"?

  A. Inventorying competitors
  B. Market structure
  C. Sources of competition
  D. All of these answers
  E. None of these answers
  E. None of these answers

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  Explanation

  All of these answers are demand determinants of value.

• Question 1208:

  The Statement of Stockholders' Equity does not report

  A. any minimum pension liability.
  B. the investment of the owners in the firm.
  C. the various accounting adjustments that reflect selected market value changes in noncurrent assets.
  D. any cumulative impact on prior period earnings.
  E. the effect of exchange rate changes on certain foreign subsidiaries.
  D. any cumulative impact on prior period earnings.

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  Explanation

  Any cumulative impact on prior period earnings is reported net of tax after extraordinary items and discontinued operations on the income statement.

• Question 1209:

  A Japanese auto company announces a new plant to be constructed in San Antonio, Texas. The company will partly finance the project with a dual currency bond offering. The $200 million offering will have a 6. 0% coupon payable in yen and mature in 2021 with the final principal payment in U.S. dollars. Indicate whether a U.S.-based investor and/or the company will assume any potential currency exchange risk related to these bonds.

  A. Investor only.
  B. Issuer only.
  C. Both the issuer and the investor.
  C. Both the issuer and the investor.

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  Explanation

• Question 1210:

  Allen Jackson believes the stock of JMH Corporation is severely overvalued. JMH trades for 12. 3 times annualized earnings, but Jackson thinks the multiple should be 8.1 times. In order to take advantage of the expected 35% drop in the price, Jackson decides to establish a short position in JMH stock. Which of the following is Jackson least likely to do in order to establish a short position?

  A. Borrow the stock from another investor.
  B. Reinvest any dividend payments.
  C. Post margin with his brokerage firm.
  B. Reinvest any dividend payments.

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  Explanation