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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1221:

  Within the Keynesian aggregate expenditure model, the central catalyst that leads to changes in output and employment is changes in

  A. prices.
  B. aggregate supply.
  C. wage rates.
  D. aggregate expenditures.
  D. aggregate expenditures.

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  Explanation

  Aggregate expenditures are the catalyst of the Keynesian model. Until full employment is attained, supply is always accommodative. Increases in aggregate expenditures thus lead to an expansion in both output and employment as long as the economy is operating below potential capacity.

• Question 1222:

  ________ analysis should precede ________ analysis.

  A. Industry; economic
  B. Company; industry
  C. Industry; company
  D. Company; economic
  C. Industry; company

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  Explanation

  In general, an industry's prospects within the global business environment determine how well or poorly an individual firm will fare, so industry analysis should precede company analysis.

• Question 1223:

  Which statement is not true?

  A. Within industries, firms tend to have similar capital structures.
  B. Most ratios vary across time within a given industry.
  C. The higher proportion of debt, the higher the return on equity ratio will be.
  D. The lower the dividend yield, the greater the anticipated price appreciation.
  E. High P/E ratios tend to go with high payout ratios.
  F. The higher the payout ratio in a given industry, the more important dividends are to shareholders.
  E. High P/E ratios tend to go with high payout ratios.

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  Explanation

  High P/E ratios tend to go with low payout ratios as both of these measures are associated with higher growth rates. Remember that low payout ratios are common for high-growth companies as they give up a paying large dividends to finance their firm.

• Question 1224:

  The cash conversion cycle equals:

  A. receivables days - inventory processing days + payables payment period.
  B. receivables days - inventory processing days - payables payment period.
  C. receivables days + inventory processing days + payables payment period.
  D. receivables days - payables payment period + inventory processing days.
  D. receivables days - payables payment period + inventory processing days.

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  Explanation

  The cash conversion cycle is a measure of how long the cash is tied up in short term loans and credits. These short-term financing items include receivables, inventory and accounts payable. The first two of these represent sources of cash while accounts payable represent a future drain of cash. So the cash conversion cycle is defined as: CCC = (Average receivables collection period) plus (Average inventory processing time) minus (Average payables payment period). A low cash conversion cycle could indicate that you are either collecting your debts or churning inventory faster or you are paying your bills slower.

• Question 1225:

  Bricks, Inc. has just installed a factory for producing titanium-strengthened bricks. The fixed costs equal $1.25 million. The bricks can be sold at $2. 25 per unit and cost $1.9 per unit in variable expenses. How many bricks must be sold by Bricks, Inc. for it to break even?

  A. 1.34 million
  B. 3. 57 million
  C. 4. 19 million
  D. 2. 19 million
  B. 3. 57 million

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  Explanation

  The break-even quantity, Q, is given by Q = FC/(P - V), where FC = total fixed costs, P = average sale price per unit and V = average variable cost per unit. In this case, Q = 1.25/(2. 25 - 1.9) million = 3. 57 million bricks.

• Question 1226:

  In a given period, the firm's beginning gross investment is 4,000 and ending gross investment is 12,000. The accumulated depreciation at the beginning was 800 and the ending balance in this account was 900. The firm uses straight-line depreciation. The average age of the firm's assets at the end of the period is ________.

  A. 5 years
  B. 13. 3 years
  C. 9 years
  D. 15 years
  C. 9 years

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  Explanation

  Note that: Average age = Accumulated depreciation/Depreciation expense. Depreciation expense = 900-800 = 100. Hence, Avg. age = 900/100 = 9 years.

• Question 1227:

  Brad Kit, CFA, is analyzing the broadcasting industry. Kit has narrowed his analysis to Willow Corp. and Vision Inc.

  Willow Corp. is a media company with a diversified group of leading TV, newspaper, and cable news operations. Revenues and earnings have grown slightly over the past ten years. The company's long-term debt to capital ratio is 40%.

  During the last recession, the company's earnings remained flat with the prior year. Still, Kit believes that Willow Corp. will have positive earnings surprises over the next several quarters, due to several new programs that have been hugely

  successful.

  Vision Inc.'s operations are located in emerging markets with a high degree of political and regulatory risk. However, the TV, radio, and internet operations have the potential for extraordinary returns. Vision's stock is trading at 30 times next

  year's earnings and five times book value.

  A client asks Kit whether Willow Corp. is a growth company or growth stock and whether Vision Inc. is a speculative company or speculative stock. Kit's most appropriate response would be that:

  A. Willow Corp. is a growth stock and Vision Inc. is a speculative stock.
  B. Willow Corp. is a growth company and Vision Inc. is a speculative stock.
  C. Willow Corp. is a growth stock and Vision Inc. is a speculative company.
  C. Willow Corp. is a growth stock and Vision Inc. is a speculative company.

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  Explanation

• Question 1228:

  A firm has a target dividend payout ratio of 36% and net income of $1.7 million. It is committed to maintaining an optimal capital structure consisting of 63% debt and 37% equity. The firm is in the 40% tax bracket. Its retained earnings breakpoint equals ________.

  A. $1.89 million
  B. $2. 58 million
  C. $1.31 million
  D. $2. 75 million
  E. $2. 94 million
  F. $3. 41 million
  G. $4. 64 million
  E. $2. 94 million

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  Explanation

  The retained earnings breakpoint refers to the maximum amount of capital that can be raised using retained earnings, assuming a constant capital structure and dividend payout ratio. In other words, it is the maximum amount of capital that can be raised without increasing the marginal cost of capital. In the present example, the maximum internal equity capital equals 1.7 * 0.64 = $1.088 million. To maintain a D/E ratio of 63/37 = 1.7, the amount of debt to be issued equals 1.088

  * 1.7 = $1.85 million. Therefore, earnings break-point equals (1.088 + 1.85) million = $2. 938 million.

• Question 1229:

  Martha Maris is a qualified investment advisor who has been handling investment accounts of a few wealthy friends for a fee. She recently interviewed with Capital Management, Inc. and accepted a position as a money manager with them. She:

  A. needs to inform only Capital Management about her old clients.
  B. must inform Capital Management as well as all her old clients in writing about the arrangement.
  C. does not have to inform her client friends about her employment with Capital Management.
  D. does not have to inform Capital Management about her old clients since they were not retained through Capital Management.
  B. must inform Capital Management as well as all her old clients in writing about the arrangement.

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  Explanation

  This is required by Standard III (B) - Duty to Employer.

• Question 1230:

  A national manufacturer of unattached garages discovered that the distribution of the lengths of time it takes two construction workers to erect the Red Barn model is approximately normally distributed with a mean of 32 hours and a standard deviation of 2 hours. What percent of the garages take between 32 and 34 hours to erect?

  A. 76. 71%
  B. None of these answers
  C. 16. 29%
  D. 34. 13%
  E. 3. 14%
  D. 34. 13%

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  Explanation

  z = (x-u)/sigma. z1 = 32 - 32/2 = 0 and z2 = 34 - 32/2 = 1. From the z tables, z = 0 and z = 1 are 0 and 0.3413 respectively. Therefore, the area under the curve is 0.3413.