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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1371:

  The method used by the U.S. Treasury to issue debt is best described as a(n):

  A. regular cycle auction--multiple price
  B. regular cycle auction--single price
  C. ad hoc auction system
  B. regular cycle auction--single price

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  Explanation

• Question 1372:

  Mary Short is a retail investor. During the course of the last several weeks, Ms. Short has been examining shares of Tellcorr Industries, a large telecommunications firm. In her examination, Mary has determined that Tellcorr's $1.05 per share dividend is anticipated to grow 20% annually. Assuming that Mary can sell her shares of Tellcorr for $70 per share at the end of three years, and that her required rate of return is 22% per year, what is the value of Tellcorr's common stock?

  A. $41.60
  B. $39.98
  C. None of these answers is correct.
  D. $59.23
  E. $63. 44
  A. $41.60

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  Explanation

  The Multiple Holding Period form of the Dividend Discount Model takes the following form: {V = {[d1 / (1 + k)] + [d2 / (1 + k)^2] + ... .[dn / (1 + k)^n] + [Pn / (1 + k)^n]}

  Where: V = the price of the common stock at t0, d1 = the annual dividend at t1 (this is found by multiplying the annual dividend at t0 by (1 + the anticipated growth rate), d2 = the annual dividend at t2 (this is found by multiplying the dividend at

  t1 by (1 + the anticipated growth rate), k = the required rate of return, n = period "n", and Pn = the sale price of the common stock at time "n".

  In this example, time "n" is the third year, as this is the end horizon for Mary's holding period. Had the investor in this example forecasted selling the shares at the end of the 10th year, then "n" would be the tenth year.

  Now that the formality of expressing the equation for this form of the DDM has been carried through, we can move toward a calculation of the value of this common stock. In this example, all of the necessary information has been provided,

  and the calculation of the value of this retail stock is as follows:

  {V = [($1.05 * 1.20) / (1 + 0.22)^] + [($1.26 * 1.20) / (1 + 0.22)^2] + [($1.512 * 1.20) / (1 + 0.22)^3] + [$70 / (1 + 0.22)^3]}

  Which can be further broken down into the following:

  {V = [$1.032787 + $1.015856 + $0.999203+ $38.549482] = $41.60}

• Question 1373:

  Ken Willis is the portfolio manager of an aggressive growth fund. Ken is concerned about the future performance of his high-beta portfolio in light of his belief that the stock market is currently overvalued. Willis' firm requires that he maintain at least 80% of the portfolio's value in equities at all times. Willis decided his best course of action is to buy put options to protect the portfolio from the potential loss resulting from a market decline. The profits and losses from an equity portfolio combined with long puts would have risk characteristics similar to a:

  A. long call option.
  B. short put and long call position.
  C. None
  A. long call option.

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  Explanation

• Question 1374:

  As the capital budgeting director for Chapel Hill Coffins Company, you are evaluating construction of a new plant. The plant has a net cost of $5 million in Year 0 (today), and it will provide net cash inflows of $1 million at the end of Year 1, $1.5 million at the end of Year 2, and $2 million at the end of Years 3 through 5. Within what range is the plant's IRR?

  A. 17 - 18%
  B. 15 - 16%
  C. 18 - 19%
  D. 14 - 15%
  E. 16 - 17%
  C. 18 - 19%

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  Explanation

  Time line: (In millions)

  012345 Years

  Financial calculator solution: (In millions)

  Inputs: CF(0) = -5; CF(1) = 1.0; CF(2) = 1.5; CF(3) = 2. 0; N(j) = 3.

  Output: IRR% = 18.37%.

• Question 1375:

  A portfolio manager with Churn Brothers Brokerage is examining shares of a newly-issued perpetual preferred stock for possible investment. The preferred stock is expected to pay a quarterly dividend of $0.70, and the required rate of return is 12. 50% per year. At what price would this preferred stock be fairly valued?

  A. None of these answers is correct.
  B. $14. 29
  C. The answer cannot be calculated from the information provided.
  D. $18.00
  E. $5. 60
  F. $22. 40
  F. $22. 40

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  Explanation

  Assuming that the quarterly dividend is to remain unchanged forever allows us to use the standard perpetuity model for preferred stock, which is illustrated as follows:

  Value of preferred stock = (Annual dividend / required rate of return)

  In this example, we are given the quarterly dividend, which must be annualized before it can be imputed into the perpetuity valuation equation. So said, a quarterly dividend of $0.70 translates into a yearly dividend of $2. 80. Incorporating this

  yearly dividend into the perpetuity valuation model will result in the following:

  Value of preferred stock = {$2. 80 / 0.125} = $22. 40

• Question 1376:

  Which of the following assumptions is least likely to be consistent with the concept of efficient capital markets?

  A. Expected returns implicitly include risk in the price of the security.
  B. Market participants correctly adjust prices based on new information.
  C. New information about securities comes to the market in a random fashion.
  B. Market participants correctly adjust prices based on new information.

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  Explanation

• Question 1377:

  If you deposit $4,250 today into a savings account paying 6% per year, compounded semiannually, how much is in your account in 4 years?

  A. $5,365. 53
  B. $6,773. 85
  C. $6,000.00
  D. $4,783. 41
  E. $5,383. 77
  E. $5,383. 77

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  Explanation

  On the BAII Plus, press 8 N, 6 divide 2 = I/Y, 4250 PV, 0 PMT, CPT FV. On the HP12C, press 8 n, 6 ENTER 2 divide i, 4250 PV, 0 PMT, FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the P/Y value set to 1.

• Question 1378:

  If you deposit $1,202. 50 into an account paying 6% per year simple interest, how much interest will you have earned in 2 years?

  A. $124. 00
  B. $126. 80
  C. $120.50
  D. $112. 50
  E. $144. 30
  E. $144. 30

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  Explanation

  Since this is a simple interest question, the formula is I=PRT, with T here being 2, since the timeframe is 2 years. On the BAII Plus, press 1202. 50 x 0.06 x 2 = to see the answer. On the HP12C, press 1202. 50 ENTER 0.06 x 2 x to see the answer. Since the question asks for the amount of interest earned, the original deposit should not be added to this value.

• Question 1379:

  As an analyst for Donavan Financial Advisors, Lou Marvin must estimate the appropriate inputs for the firm's equity valuation models. Donavan's preferred valuation model is the single-stage dividend discount model (DDM). Members of Marvin's valuation team have supplied him with several pieces of data related to TMQ Utilities, including the company's earnings and dividends from the most recent year, the expected real risk-free rale, and the expected nominal growth in net income. To estimate the value of TMQ Utilities, additional inputs to the DDM that will be necessary include the:

  A. price-to-cash flow ratio and the expected cash flow per share.
  B. expected rate of inflation and the expected earnings retention rate.
  C. historical growth rates in dividends and the required return on the Utility bond index.
  B. expected rate of inflation and the expected earnings retention rate.

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  Explanation

• Question 1380:

  Extraordinary items are placed on the income statement:

  A. after net income from continuing operations and net of tax.
  B. as a footnote to the statement as they are 1 time items and are not a part of the normal course of business for a corporation.
  C. within income from operations net of tax.
  D. after net income from continuing operations and before taxes.
  A. after net income from continuing operations and net of tax.

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  Explanation

  Extraordinary items are always included net of tax after the net income from continuing operations. These items are unusual items for the company and occur infrequently.