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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1271:

  A dataset of 105 observations is organized in a relative frequency distribution into 9 classes. The sum of the relative frequencies across all the classes equals ________.

  A. 9
  B. 1
  C. 105
  D. 100
  B. 1

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  Explanation

  Relative class frequencies are percentages and across all classes, they must sum up to 100%, which is the same as summing up to 1.00.

• Question 1272:

  If the spread between the required rate of return on a stock and the dividend growth rate decreases, the price of the stock:

  A. is not affected.
  B. decreases.
  C. is not affected or increases.
  D. increases.
  D. increases.

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  Explanation

  In the usual notation, the Dividend Discount Model gives Po = D1/(k-g). When k - g decreases, all else equal, the stock price rises.

• Question 1273:

  The inflation rate in an economy currently in equilibrium jumps up unexpectedly. According to the Adaptive Expectations hypothesis, unemployment will in the short run.

  A. all of these answers can happen.
  B. decrease
  C. increase
  D. remain unaffected.
  B. decrease

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  Explanation

  According to the Adaptive Expectations hypothesis, people consider the recent past as the best predictor of the immediate future. Therefore, when the inflation rate jumps up unexpectedly, workers using adaptive expectations will lag behind

  in their estimates and underestimate the future inflation. Hence, they will get into wage contracts that will under-compensate for the higher inflation. Over a short run, this will lead to improved profit margins for businesses, who will expand the

  output by utilizing more resources. In the short run, unemployment rate will fall.

  Over the long run, this mistake gets corrected, wages increase and unemployment rate falls back to the natural rate.

• Question 1274:

  If the senior members of an investment advisory firm are unwilling to disseminate negative information about a firm, the advisory should

  A. none of these answers.
  B. refrain from making an investment recommendation citing proprietary reasons.
  C. disseminate only factual information about the firm and refrain from making any research comments.
  D. release the report without the negative information.
  C. disseminate only factual information about the firm and refrain from making any research comments.

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  Explanation

  "Procedures for Compliance," Standard IV (A.3)

• Question 1275:

  According to the infinite period dividend discount model, the value of a common stock is equal to

  A. next period's dividend, divided by the required rate of return minus the growth rate of dividends.
  B. this period's dividend, divided by the growth rate of dividends.
  C. this period's dividend, divided by the required rate of return minus the growth rate of dividends.
  D. next period's earnings, divided by the required rate of return minus the growth rate of dividends.
  E. this period's earnings, divided by the required rate of return minus the growth rate of dividends.
  A. next period's dividend, divided by the required rate of return minus the growth rate of dividends.

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  Explanation

  With certain assumptions, including a constant rate of dividend growth, the infinite period Dividend Discount Model can be simplified to D1 / (k - g), where D1 is next period's dividend, k is the required rate of return, and g is the growth rate of dividends.

• Question 1276:

  The quarterly compounded rate is 8% quoted on an annualized basis. The equivalent annually compounded rate is:

  A. 8.00%
  B. 8.24%
  C. 8.16%
  D. 7. 95%
  B. 8.24%

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  Explanation

  To solve such problems, think about investing a dollar for a year. The final amount should be the same under both the quotations. Under annually compounded rate, r, $1 grows to 1+r in 1 year. Under quarterly compounding, it grows to (1 +0.08/4)^4 = 1.0824. Since these two should be equal, we get 1+r = 1.0824, giving r = 8.24%. Note that the annually compounded rate must be larger than the quarterly rate, ruling out (d) automatically.

• Question 1277:

  If the dividend payout ratio for a stock market series is anticipated to increase as the industry advances towards relative maturity, which of the following would occur assuming that both the required return and expected growth rate remain constant? Further, what would occur if the growth rate of dividends were to exceed the required rate of return?

  A. The earnings multiplier would increase; the earnings multiplier would produce a nonsensical (negative) answer.
  B. The earnings multiplier would increase; the earnings multiplier would produce a nonsensical (very large) answer.
  C. The earnings multiplier would decrease; the earnings multiplier would increase.
  D. The earnings multiplier would decrease; the earnings multiplier would produce a nonsensical (negative) answer.
  E. The earnings multiplier would increase; the earnings multiplier would decrease.
  A. The earnings multiplier would increase; the earnings multiplier would produce a nonsensical (negative) answer.

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  Explanation

  Remember that the equation used to determine the appropriate earnings multiplier for a stock market series is the following:

  P/E = [D/E / (k - g)]

  Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated growth rate of dividends.

  From observing this equation, we can determine what would happen if the dividend payout ratio were to increase. The result is largely intuitive once an understanding of dividend discount methodology is gained. An increase in the dividend payout ratio will lead to an increase in the earnings multiplier assuming that both the required rate of return and the anticipated growth rate are assumed to remain unchanged. In reality, this assumption is nonsensical in this case. Specifically, the dividend payout ratio is anticipated to increase because the industry is advancing toward relative maturation. In other words, companies comprising the series are expected to pay out more of their earnings as dividends due to diminishing positive NPV investment opportunities. By definition this would decrease the anticipated growth rate, which would in turn lead to a decline in the earnings multiplier.

  If the anticipated growth rate were to exceed the required rate of return, the resulting earnings multiplier would be nonsensical. Specifically, the earnings multiplier produced would be a negative number.

• Question 1278:

  Which of the following is usually not a feature of cumulative preferred stock?

  A. Has priority over common stock with regard to assets.
  B. Has priority over common stock with regard to earnings.
  C. None of these answers.
  D. Has the right to receive dividends in arrears before common stock dividends can be paid.
  E. Has voting rights.
  E. Has voting rights.

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  Explanation

  Preferred stock does not usually have voting rights. Preferred shareholders are usually given the right to vote for directors only if the company has not paid the preferred dividend for a specified period of time, such as 10 quarters.

• Question 1279:

  ________ in real estate are the additions to a site, such as building, sidewalks, and various on-site amenities.

  A. Improvements
  B. All of these answers.
  C. Enhancements
  D. Betterments
  E. None of these answers
  A. Improvements

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  Explanation

  Also, building size is usually measured and expressed in terms of square footage.

• Question 1280:

  Estimate the dividend growth for a company that exhibits the following characteristics:

  Retention rate 75%

  Payout rate 25%

  Return on Equity (ROE) 20%

  A. 15%
  B. 12%
  C. 10.0%
  D. 9.6%
  E. 6. 4%
  F. 25%
  A. 15%

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  Explanation

  The estimated growth rate of dividends = (Retention Rate) x (Return on Equity). In this case the estimated growth rate of dividends = 75% x 20% = 15%.