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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1401:

  An analyst just received the following information for Mythical Interactions, Inc. A senior equity trader in her group wants to know if he should purchase a large block of the stock. Based on the assumptions above, which of the following recommendations is CORRECT? The analyst should advise the trader to:

  A. not purchase the stock. It is overvalued by approximately $10.00.
  B. purchase the stock. It is undervalued by approximately $8.00.
  C. purchase the stock. It is undervalued by approximately $14. 20.
  D. not purchase the stock. It is overvalued by approximately $14. 20.
  B. purchase the stock. It is undervalued by approximately $8.00.

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  Explanation

  To determine whether the trader should purchase the stock, we need to determine if the stock is overvalued or undervalued. Given the information in this problem, we will use the price/earnings (P/E) ratio and the earnings per share (EPS) to

  calculate an estimated value.

  The P/E ratio = Dividend Payout Ratio / (ke

• Question 1402:

  Which of the following firms would likely have the lowest dividend payout ratio? Further, the capital structure of this firm would likely be weighted more heavily with debt or equity? Choose the best answer.

  A. A fledgling biotechnology company; equity
  B. A nationwide grocery chain; debt
  C. A healthcare company specializing in home care; debt
  D. A specialty retailer; equity
  E. A large computer manufacturer; debt
  A. A fledgling biotechnology company; equity

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  Explanation

  Of the firms listed, the biotechnology company would be expected to have the lowest dividend payout ratio. The nascent biotechnology industry is characterized by a high degree of investment in research and development, along with a high

  growth rate and high level of uncertainty. All of these factors are conducive to a high retention rate, i.e. a low dividend payout ratio.

  Further, firms within industries associated with high growth rates and high levels of uncertainty are likely to be financed primarily with equity. This is reasoned by several factors, some of which include the following:

  Firms in new industries typically have a balance sheet weighted heavily toward intangible assets, which can neither be easily liquidated nor pledged as collateral for a loan. Firms in new industries are characterized by a high degree of

  research and development expenses. Equity provides firms with a higher degree of agility than debt financing.

  The cash flows of firms in developing industries are characterized by a high degree of uncertainty.

• Question 1403:

  Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are correct.

  Cash from operating activities $60,000

  Net Income (4,000)

  Depreciation (2,000)

  Increase in accounts receivable (1,000)

  Increase in deferred tax liability $53,000

  Cash from investing activities ($48,000)

  Purchase of marketable securities 2,500

  Dividends received 1,500

  Dividends paid ($44,000)

  Cash from financing activities (500)

  Increase in Short-term debt (2,500)

  Increase in Long-term debt ($3,000)

  Increase in cash $6,000

  The correct cash flows from operating activities is ________.

  A. $65,500
  B. $63,500
  C. $53,500
  D. None of these answers
  A. $65,500

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  Explanation

  60,000 + 4000(depreciation) - 2,000 (receivables) + 1,000 (deferred taxes) +2,500 (dividends received)

• Question 1404:

  Firms with records or performance calculations for periods prior to the effective dates for AIMR-PPS compliance can still claim compliance with the PPS using which of the following methods?

  I. Restate all of its performance numbers in accordance with the standards.

  II. Continue to use the non-conforming performance measures with specific disclosures about how the measures are not in compliance.

  III.

  Use the relaxed standards of AIMR designed specifically for this situation.

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

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  Explanation

  All three are acceptable ways in which firms with records or performance calculations for periods prior to the effective dates for AIMR-PPS compliance can continue to claim compliance with the PPS. This is known as "Retroactive Compliance."

• Question 1405:

  The ________ ratio has been used extensively in the valuation of bank stocks because bank assets often have similar book values and market values.

  A. price/book value
  B. economic value added
  C. market value-added
  D. franchise factor
  E. price/cash flow
  A. price/book value

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  Explanation

  The P/BV ratio has become important as a measure of relative value for stocks. The relationship between the market price of a stock and its book value per share can be used as a relative measure of valuation because, under theoretically ideal conditions, the market value of a firm should reflect its book value. However, particularly with industrial firms, an increase in the estimates of breakup value has caused the average P/BV ratio to experience a volatile increase over time.

• Question 1406:

  Technical analysis

  A. holds that superior returns can be gained from the use of fundamental economic and company variables.
  B. holds that past stock performance has no influence on future performance.
  C. holds that past market price and volume data can be used to predict future performance.
  D. is supported by the efficient market hypothesis.
  C. holds that past market price and volume data can be used to predict future performance.

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  Explanation

  Technical analysis, in contrast to the efficient market hypothesis and fundamental analysis, holds that past price and volume data can be used to discover market trends that can predict future market behavior. Technical analysts believe that "the market is its own best predictor."

• Question 1407:

  Given the following information, what is the required cash outflow associated with the acquisition of a new machine; that is, in a project analysis, what is the cash outflow at t = 0? Purchase price of new machine $8,000 Installation charge 2,000 Market value of old machine 2,000 Book value of old machine 1,000 Inventory decrease if new machine is installed 1,000 Accounts payable increase if new machine is installed 500 Tax rate 35% Cost of capital 15%

  A. -$6,460
  B. -$8,980
  C. -$12,020
  D. -$5,200
  E. -$6,850
  E. -$6,850

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  Explanation

  Cost plus installation($10,000)

  Sale of old machine+2,000

  Tax effect of sale ($1,000 x 0.34)(350)

  Decrease in working capital1,500

  Total investment at t = 0($6,850)

• Question 1408:

  Which of the following statements about portfolio theory is false:

  A. Total risk equals systematic risk plus unsystematic risk.
  B. If a security plots above the SML it is undervalued.
  C. The risk measure associated with the CML is standard deviation (total risk).
  D. If a security plots above the theoretical CML it is undervalued.
  D. If a security plots above the theoretical CML it is undervalued.

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  Explanation

  No security can plot above the theoretical CML. All risky securities must be contained within or lie upon the efficient frontier and the CML is tangent to the efficient frontier.

• Question 1409:

  The implications of stock market efficiency for fundamental analysis indicates that using the top-down approach to analyze a firm will yield:

  A. superior returns using past and current information.
  B. superior returns compared to a randomly selected buy-and-hold portfolio of stocks.
  C. returns that are not superior if the analysis only looks at past and current information.
  D. superior returns using only past information.
  C. returns that are not superior if the analysis only looks at past and current information.

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  Explanation

  The evidence is that fundamental analysis does not lead to superior returns using the top-down approach if the analyst uses only past and current information. The analyst's job has to be directed towards doing a superior job of estimating the variables that cause long-run trends in realized returns.

• Question 1410:

  What is the present value today of these annual cash flows: $2,500, $1,200, $300? Assume the first cash flow occurs 1 year from today and an interest rate of 9% per year, compounded annually.

  A. $3,535. 25
  B. $4,000.00
  C. $3,976. 69
  D. $3,608.82
  E. $3,114. 09
  A. $3,535. 25

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  Explanation

  You could solve this question using 3 different compound interest problems, but it is easier to solve them using the calculator's cash flow functions. On the BAII Plus, press CF 2nd CLRWork 0 ENTER DownArrow 2500 ENTER DownArrow DownArrow 1200 ENTER DownArrow DownArrow 300 ENTER DownArrow DownArrow 2nd Quit. Then press NPV 9 ENTER DownArrow CPT. On the HP12C, press these keys: 0 BlueShift CFo 2500 BlueShift CFj 1200 BlueShift CFj 300 BlueShift CFj. Then press 9 i, YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure that the BAII Plus has the P/Y value set to 1.