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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1431:

  Most market value appraisals, when estimating the value of real estate, are ________.

  A. looking forward in time
  B. both looking backward and forward in time
  C. looking backward in time
  D. neither looking forward nor backward in time
  C. looking backward in time

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  Explanation

  Most information that is gathered by an appraiser is based on events that have already taken place, for example, sales prices of comparable properties that have closed in the past.

• Question 1432:

  Assume the following information about a stock market series:

  Observed beginning series value: 1677 Anticipated ending series value: 1890 Expected dividends during the period: $16. 36 Required rate of return: 19.50% per year

  What is the expected annual rate of return for this index? (Assume a one-year holding period.)

  A. 12. 14%
  B. 14. 79%
  C. 10.40%
  D. None of these answers is correct.
  E. 11.73%
  D. None of these answers is correct.

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  Explanation

  The anticipated rate of return for this stock market series is found as 13. 68%. Thus, none of these answers is correct.

  To calculate the expected rate of return for a stock market series, the following information must be known:

  The beginning value for the series

  The anticipated ending value for the series, and

  The amount of any dividends and/or distributions during the period

  Once this information has been determined, the expected return on a stock market index can be found by employing the following equation:

  E(R) = [(EV - BV + Div) / BV]

  Where: E(R) = the expected return on the stock market series, EV = the anticipated ending value for the series, BV = the observed beginning value for the series, and Div = the amount of any dividends paid during the period.

  In this example, all of the necessary information has been provided and the calculation of the expected return on this stock market series is found as follows:

  E(R) = [$1890 - $1677 + $16. 36] / 1677 = 13. 68%

  This is significantly less than the required rate of return. Assuming that both the ending value and dividend figure is accurate, investment in this stock market series is likely not warranted.

• Question 1433:

  When a firm's inventory undergoes LIFO liquidation under rising prices, it experiences ________.

  A. higher income and higher cash flows
  B. higher income and lower cash flows
  C. lower income and lower cash flows
  D. lower income and higher cash flows
  B. higher income and lower cash flows

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  Explanation

  In LIFO liquidation under rising prices, the quantity of goods purchased during a period is less than the quantity sold. This leads to a sale of goods purchased in prior periods at lower prices (since prices are rising). This understates the costof-goods-sold (COGS), thus overstating the income and causing higher taxes than in the absence of the LIFO liquidation. The higher taxes cause a higher cash outflow. (This is an extremely important topic that you should be completely familiar with)

• Question 1434:

  At a local burger joint, 3 workers receive $5. 3 per hour, 4 workers receive $4. 9 per hour and 2 workers receive $8.1 per hour. The average pay of a worker at the joint is ________.

  A. $5. 18
  B. none of these answers
  C. $5. 74
  D. $6. 10
  C. $5. 74

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  Explanation

  There are 3 + 4 + 2 = 9 workers. The total wages paid equal 3*5. 3 + 4*4. 9 + 2*8.1 = $51.7. The average pay equals 51.7/9 = $5. 74

• Question 1435:

  The problem with using the confidence index as an indicator of investor sentiment is that:

  A. it ignores the equity market in its calculation.
  B. it ignores the supply side of the bond market.
  C. it is difficult to calculate precisely due to incomplete bond data.
  D. it is difficult to calculate precisely due to incomplete bond data and it ignores the supply side of the bond market.
  B. it ignores the supply side of the bond market.

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  Explanation

  The Confidence index is the ratio of the average yield on 10 top grade bonds to the Dow Jones average of 40 bonds. The index measures the difference in yield spreads between high-grade bonds and a large cross-section of available bonds. An increase in this index implies that the yield spread between the bonds has narrowed. Now, from a demand perspective, this will happen when the demand for riskier bonds rises. However, the spread could also decrease if the supply of the risky bonds decreases relative to the highgrade bonds. In that case, the change in the confidence index simply reflects the credit needs of the economy and not a change in the risk appetite of investors.

• Question 1436:

  Pete Morris has written a deep out-of-the-money call option on the stock of Omacon, a small capitalization technology company with a very promising medical software product. Omacon stock had risen 365% for the 12 months ended just three weeks ago, but delays with release of the new software have disappointed investors, and the stock has lost 50% of its market value in the past three weeks. When he wrote the options yesterday, Morris received a premium of $3. 00 each. Morris would have risk only:

  A. if the stock price rose above the option strike price.
  B. if the stock price fell below the option strike price.
  C. in the amount of the premium he received.
  A. if the stock price rose above the option strike price.

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  Explanation

• Question 1437:

  Members ________ to be in compliance with the Performance Presentation Standards to be in compliance with Standard V (B).

  A. are not required
  B. may be required
  C. are always required
  D. none of these answers
  E. will be required, as of 1/1/2001,
  F. will be required, as of 1/1/2002,
  A. are not required

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  Explanation

  The PPS are voluntary standards that a member or a firm may adopt in compiling and presenting performance figures. AIMR adopted and promotes the PPS as a method of obtaining industry wide uniformity in performance presentation information so that results are directly comparable among investment managers. Members are not required to be in compliance with the PPS to be in compliance with Standard V (B).

• Question 1438:

  The following is referred to as the critical event in income determination:

  A. recording of revenues
  B. recording of changes in cash
  C. recording of changes in retained earnings during the period
  D. recording of expenses
  A. recording of revenues

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  Explanation

  Recording revenues at the proper time is the critical event. Expenses are typically easier for companies to allocate to the proper periods. Expenses are more certain than revenues for most companies.

• Question 1439:

  Mermen, Inc., a manufacturer of male swimwear, has a return on equity of about 7. 2%. It typically pays out about 33% of its earnings as dividends. The firm's stock has a covariance with the market of 0.045. The market has an expected

  return of 12. 9% and a standard deviation of 19.4%. The prevailing risk-free rate is 4. 9% and Mermen's stock return has a standard deviation of 23%. Most analysts in the market are of the opinion that Mermen's EPS next year is likely to be

  around $9.20 per share. Given these data,

  Mermen's share price should be about:

  A. $41.62
  B. $29.28
  C. $37. 22
  D. $38.94
  C. $37. 22

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  Explanation

  The CAPM expected rate of return on the stock is equal to the risk-free rate plus beta times the market premium. The beta of the stock equals 0.045/(0.194 * 0.23) = 1.01. So the expected return on Mermen's stock is 4. 9% + 1.01*(12. 9 4. 9)% = 12. 98%.

  The Dividend Discount Model implies that Mermen's share price is given by Po = D1/(k-g), using standard notation. We have D1 = 0.33 * 9.2 = $3. 036. The dividend growth rate is given by g = ROE*(1-dividend payout ratio) = 7. 2% * 0.67 =

  4. 824%. The price of the stock then equals 3. 036/(12. 98% - 4. 824%) = $37. 22.

• Question 1440:

  When an auditor finds that the audit is insufficient in scope to render an opinion, he will issue ________.

  A. an unqualified opinion
  B. an adverse opinion
  C. a qualified opinion
  D. a disclaimer of opinion
  D. a disclaimer of opinion

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  Explanation

  A disclaimer of opinion is a statement of inability to express an opinion.