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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1311:

  An employee has a duty of ________ to his current employer, even if he has already disclosed plans to leave within the near future.

  A. loyalty
  B. judgment
  C. none of these answers
  D. sagacity
  E. prudence
  A. loyalty

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  Explanation

  Standard III (B) states that a departing employee is free to make preparations to go into a competitive business before terminating the relationship with the employee's current employer provided that such preparations do not breach the employee's duty of loyalty.

• Question 1312:

  If a company uses the same discount rate for evaluating all projects, which of the following results is likely?

  A. Accepting no projects.
  B. Accepting poor, high-risk projects.
  C. Accepting only poor, high-risk projects.
  D. Accepting only good, low risk projects.
  E. Accepting all projects.
  B. Accepting poor, high-risk projects.

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  Explanation

  Under the risk-adjusted discount rate, differential project risk is dealt with by changing the discount rate. High-risk projects are discounted at a higher cost of capital; lower-risk projects are discounted at a rate below the firm's average cost of capital, etc. This approach incorporates project risk into capital budgeting.

• Question 1313:

  What is the variable used to predict the value of another called?

  A. Correlation
  B. Determination
  C. Dependent
  D. None of these answers
  E. Independent
  E. Independent

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  Explanation

  The dependent variable is the variable Y which is being predicted by the X variable, the independent variable. The regression is written as Y = a + bX. The letter "a" is the Y intercept and b is the slope of the line.

• Question 1314:

  Which of the following is/are true about available-for-sale securities?

  I. They are current assets.

  II. They are reported at fair market value.

  III.

  Changes in their reported value are allocated directly to retained earnings.

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

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  Explanation

  Marketable securities classified as "Available-for-sale" are financial securities which management does not intend to hold to maturity and may or may not sell in the near future. They may be categorized as either current or non-current assets, depending on the management's projected horizon over which they will be sold. They are reported on the balance sheet at the fair market value and changes in their values are reported as a separate component of shareholder equity.

• Question 1315:

  A sample of the monthly amounts spent for food by families of four receiving food stamps approximates asymmetrical distribution. The sample mean is $150 and the standard deviation is $20. About 95 percent of the monthly food

  expenditures are between what two amounts?

  A. None of these answers
  B. $110 and $190
  C. $205 and $220
  D. $85 and $105
  E. $100 and $200
  B. $110 and $190

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  Explanation

  About 95% of the observations lie between plus and minus two standard deviations from the mean.

• Question 1316:

  Empirical testing has confirmed the validity of which of the following dividend theories?

  A. Tax differential theory.
  B. Empirical testing has not produced any definitive results.
  C. Empirical testing has produced some evidence in support of each of these theories.
  D. Dividend irrelevance, or Modigliani-Miller, theory.
  E. Bird-in-the-hand theory.
  C. Empirical testing has produced some evidence in support of each of these theories.

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  Explanation

  These 3 theories have produced unclear empirical tests because of two reasons: 1. For a valid statistical test, things other than dividend policy must be held constant, and 2. We must be able to measure with a high degree of accuracy each sample firm's cost of equity. Neither of these two conditions holds.

• Question 1317:

  The infinite period ________ model assumes that k is greater than g.

  A. growth
  B. SP
  C. Dividend Discount Model
  D. valuation
  C. Dividend Discount Model

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  Explanation

  The infinite period Dividend Discount Model has the following assumptions:

  1. Dividends grow at a constant rate

  2. The constant growth rate will continue for an infinite period

  3. The required rate of return (k) is greater than the infinite growth rate (g). If it is not, the model gives meaningless results because the denominator becomes negative.

• Question 1318:

  Business risk is concerned with the operations of the firm. Which of the following is not associated with (or not a part of) business risk?

  A. The ability to change prices as costs change.
  B. Changes in required returns due to financing decisions.
  C. The extent to which operating costs are fixed.
  D. Demand variability.
  E. Sales price variability.
  B. Changes in required returns due to financing decisions.

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  Explanation

  Business risk depends on:

  (1)

  unit sales variability,

  (2)

  sales price variability,

  (3)

  input price variability,

  (4)

  ability to adjust output prices for changes in input prices and,

  (5)

  the extent to which costs are fixed (operating leverage).

• Question 1319:

  Excerpts from the balance sheet of Milton Corporation as of April 30, 1997 are presented as follows:

  Cash $725,000 Accounts receivable (net) $1,640,000 Inventories $2,945,000 Total current assets $5,310,000 Accounts payable $1,236,000 Accrued liabilities $831,000 Total current liabilities $2,067,000

  The board of directors of Milton met on May 5, 1997 and declared a quarterly cash dividend in the amount of $200,000 ($0.50 per share). The dividend was paid on May 28, 1997 to shareholders of record as of May 15, 1997. Assume that the only transactions that affected Milton during May 1997 were the dividend transactions. Milton's total shareholders' equity would be

  A. unchanged by either the dividend declaration or the dividend payment.
  B. decreased by the dividend declaration and unchanged by the dividend payment.
  C. decreased by the dividend payment and unchanged by the dividend declaration.
  D. none of these answers.
  E. increased by the dividend declaration and unchanged by the dividend payment.
  B. decreased by the dividend declaration and unchanged by the dividend payment.

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  Explanation

  The declaration of the dividend results in an increase in dividends payable (a current liability account) and a corresponding decrease in retained earnings (a shareholders' equity account). Therefore, the declaration of a dividend reduces shareholders' equity. The subsequent payment of the dividend has no effect on shareholders' equity because that transaction reduces cash and reduces the previously recorded dividends payable.

• Question 1320:

  AIMR Standard ________ prohibits plagiarism.

  A. I (D)
  B. IV (A)
  C. None of these answers
  D. II (C)
  E. III (B)
  D. II (C)

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  Explanation

  Standard II (C) - Prohibition against Plagiarism states: "Members shall not copy or use, in substantially the same form as the original, material prepared by another without acknowledging and identifying the name of the author, publisher, or source of such material. Members may use, without acknowledgment, factual information published by recognized financial and statistical reporting services or similar sources."