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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 131:

  If debt financing is used, which of the following is correct?

  A. The percentage change in net operating income is greater than a given percentage change in net income.
  B. The percentage change in net operating income is less than the percentage change in net income.
  C. The percentage change in net operating income is equal to a given percentage change in net income.
  D. The percentage change in net operating income depends on the interest rate charged on debt.
  E. The degree of operating leverage is greater than 1.
  B. The percentage change in net operating income is less than the percentage change in net income.

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  Explanation

  This is because the interest charges on debt are included in net income and not operating income.

• Question 132:

  What entity is presently responsible for establishing accounting standards?

  A. The Financial Accounting Standards Board.
  B. The FDA.
  C. The Securities and Exchange Commission.
  D. The Internal Revenue Service.
  E. The Federal Accounting Society Board of Directors
  A. The Financial Accounting Standards Board.

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  Explanation

  The Financial Accounting Standards Board.

• Question 133:

  According to the "Tax Preference Theory," which factor(s) would lead investors to desire a lower payout of dividends over a relatively higher payout of dividends?

  I. Capital gains may be taxed at a lower marginal rate than ordinary income

  II. The cost of retained earning equity capital is usually lower than debt capital

  III. Capital gains are not taxed until the stock is sold and the gain is realized

  IV.

  If the stock is held until the owner dies, the beneficiary may use the stock price at the time of inheritance as the basis, thus any capital gains up until that point are not taxed

  V.

  Investors prefer a stable dividend policy

  A. None of these answers
  B. I only
  C. I, III and IV
  D. I, II, III, IV and V
  E. II and III
  C. I, III and IV

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  Explanation

  The "Tax Preference Theory" states that there may be three reasons that investors would prefer lower dividend payments along with higher capital gains as opposed to high dividend payments. Long term capital gains may be taxed at a lower marginal rate than ordinary income (dividends). Also, investors have more control over when the taxable event occurs with capital gains. They are not taxed until the stock is sold and the gain is realized. Finally, if the stock is held until death, the beneficiary may claim the value at that time as the basis, thus avoiding taxes on any gains that previously accrued.

• Question 134:

  Which of the following is/are true?

  I. There are as many values above the mean as below it.

  II. The sum of the differences between the observations in a sample and the mean of the sample equals zero.

  III. The mean is greatly affected by "outliers."

  IV.

  The mean is harder to estimate with reliability for open-ended data.

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

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  Explanation

  I would be correct if "mean" is replaced by "median" i.e. there are as many values above the median as below it. Note that one of the advantages of using the median instead of the mean is that the mean is greatly affected by outliers since it represents an average of all the observations while the median is not affected in this fashion.

• Question 135:

  Simmons Shoes is considering a project with the following cash flows:

  TimeProject Cash Flows ($)

  0-700

  2-200

  Simmons' WACC is 10 percent. What is the project's modified internal rate of return (MIRR)?

  A. 28.93%
  B. 17. 10%
  C. 18.26%
  D. 29.52%
  E. 25. 28%
  C. 18.26%

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  Explanation

  There are three steps to getting an MIRR:

  1. Find PV of outflows:

  -$700 + -$200/(1.1)^2 = -$865. 2893.

  2. Find FV of inflows:

  $400 (1.1)^3 + $600(1.1) + $500 = $1,692. 40.

  3. Find MIRR:

  N = 4

  PV = -865. 2893

  PMT = 0

  FV = 1,692. 40

  Solve for I = MIRR = 18.2593%.

• Question 136:

  According to Keynesians, which of the following is/are true?

  I. Wages and prices are flexible and automatically direct an economy toward full employment.

  II. Changes in output rather than changes in prices direct an economy toward equilibrium.

  III.

  An economy can be in equilibrium even if there isn't full employment prevailing.

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

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  Explanation

  Keynesian economics maintains that businesses produce only the quantities consistent with anticipated demand. Thus, expected aggregate expenditures are crucial to determining the state of the economy. If the planned expenditures exceed the anticipated demand, then the economy will expand and vice versa. Equilibrium will be attained where output equals the spending level. Hence, in Keynesian economics, equilibrium can occur at any level of output and employment rate, even if that level is less than the potential GDP. Further, only changes in demand will fuel changes in output; changes in prices will not be capable of moving an economy toward equilibrium.

• Question 137:

  Standard IV (B.5) deals with ________.

  A. Disclosure of Conflicts to Clients and Prospects
  B. Prohibition against Use of Material Nonpublic Information
  C. None of these answers
  D. Preservation of Confidentiality
  E. Prohibition against Misrepresentation
  F. Priority of Transactions
  G. Disclosure of Referral Fees
  H. Performance Presentation
  D. Preservation of Confidentiality

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  Explanation

  Standard IV (B.5) deals with the preservation of confidentiality of information communicated by clients or employers concerning matters within the scope of the client-member, employer-member relationship.

• Question 138:

  Alpha is a 9% load-fund, which you expect to have an annual rate of return of about 19% over the next 2 years. Beta is a no-load fund, which is expected to have a rate of return of around 13%. If your investment horizon is 2 years, which fund should you invest in and what is your expected net rate of return per year?

  A. Alpha; 13. 5%
  B. none of these answers
  C. Beta; 13. 0%
  D. Alpha; 17. 3%
  A. Alpha; 13. 5%

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  Explanation

  With fund Alpha, a deposit of $100 will give you shares worth $91 after the load charge is taken into account. This amount is expected to grow to 91*(1+0.19)^2 = $128.87. Thus, the net return with Alpha is expected to be (128.87/100)^0.5 - 1 = 13. 52% per year, annually compounded. Hence, for a 2 year horizon, you should select Alpha, since Beta has an annual rate of 13%.

• Question 139:

  Which of the following correctly describes how expansionary fiscal policy through tax cuts eventually impacts employment?

  A. Tax cuts result in more income for consumers, which shifts the aggregate demand curve upward, which increases the price level. This inflationary effect encourages firms to use more flexible labor and less inflexible capital.
  B. A tax cut shifts the aggregate demand curve out. This causes upward movement along the aggregate supply curve, which increases resource utilization.
  C. Tax cuts result in more government debt which causes the interest rate to rise and therefore unemployment to fall.
  D. Tax cuts result in a multiplier effect, as politicians showing confidence in the economy encourages businesses to spend on expansions.
  E. The tax cut causes an increase in quantity demand. This causes an outward shift in the aggregate supply curve and hence more employment.
  B. A tax cut shifts the aggregate demand curve out. This causes upward movement along the aggregate supply curve, which increases resource utilization.

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  Explanation

  Consumers react to tax cuts as if it were an increase in income. This causes more demand for goods and services at every price level. The demand curve would therefore shift to the right. This causes movement along the supply curve, expanding output. This expansion in output should reduce slack resources, i.e. unemployment.

• Question 140:

  Type I error refers to the event that we will:

  A. Accept the alternative when it is true.
  B. none of these answers.
  C. Reject the null when it is true.
  D. Fail to reject the null when it is false.
  E. Reject the alternative when it is true.
  C. Reject the null when it is true.

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  Explanation

  Remember that the null hypothesis is the one that you maintain to be true unless there is sufficient evidence to prove otherwise. Therefore, the first type of mistake that can happen is that you reject the maintained hypothesis when in fact, it is true. This error is referred to as "Type I" error. On the other hand, you may not have sufficient evidence to disprove the null when in fact, it is false. This failure to appropriately reject the null is referred to as "Type II" error.