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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1451:

  A project requires an initial outlay of 650. It also needs capital spending of 700 at the end of year 1 and 900 at the end of year 2. It has no revenues for the first 2 years but receives 1,200 in year 3, 1,600 in year 4 and 2,300 in year 5. The project's payback period equals ________.

  A. 4. 54 years
  B. 2. 26 years
  C. 3. 66 years
  D. 4. 91 years
  D. 4. 91 years

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  Explanation

  The cash flows of the project starting at the end of year 1 are:

  -700, -900, +1,200, +1,600, +2,300

  The payback period is defined as the expected number of years that would be required to recover the original investment. In particular, Payback period = Years before full recovery + (unrecovered cost at the start of payback year)/(net cash

  flow in the payback year) The net account balance goes positive in the 4th year. At the beginning of the 4th year, the outstanding balance equals 650+700+900-1,200 = $1,050. Therefore, payback period = 3 + 1,050/1,600 = 3. 66 years.

• Question 1452:

  Which of the following transactions belong to the Current account?

  I. Balance of services.

  II. Unrequited transfers.

  III. Purchase of a foreign company.

  IV.

  Income from foreign investments.

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

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  Explanation

  The current account consists of Trade and Services balance, Net income from all foreign investments and Unrequited transfers, which include aid to foreign countries, losses due to expropriation of property by foreign governments, etc. Hence, I, II and IV are directly specified as part of the Current account. A purchase of a foreign firm is a capital investment and as such belongs to the Capital account.

• Question 1453:

  Which of the following statements is NOT correct?

  A. Members who work in a country where the Code and Standards impose a lesser degree of responsibility than local laws and regulations must still adhere to the Code and Standards.
  B. All of these statements are correct.
  C. Standards II through V address specific conduct.
  D. Standard I sets forth minimum standards relating to general activities.
  A. Members who work in a country where the Code and Standards impose a lesser degree of responsibility than local laws and regulations must still adhere to the Code and Standards.

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  Explanation

  If a member lives in a country, or provides investment services to a client residing in a country, with more strict securities laws than the Codes and Standards, he/she must comply with the more strict laws and regulations of the country.

• Question 1454:

  Which of the following would most likely cause a nation's currency to appreciate?

  A. an increase in real interest rates abroad
  B. an increase in inflation of the nation's trading partners
  C. an increase in the nation's domestic inflation rate
  D. a decrease in domestic real interest rates
  B. an increase in inflation of the nation's trading partners

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  Explanation

  Inflation in a nation's trading partners implies that prices are rising abroad. This would increase the demand for the nation's output because consumers will prefer imports to domestic output because it will be relatively less expensive since its prices are not rising. Increased demand for output increases the demand for the nation's currency and therefore the currency will appreciate.

• Question 1455:

  Given that the expected dividend payout ratio on a common stock is 0.65, the required rate of return is 15%, and the dividend growth rate is 6%, using the earnings multiplier model, what is the P/E ratio?

  A. Not enough information
  B. 8.20
  C. 6. 75
  D. 7. 22
  E. 10.59
  D. 7. 22

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  Explanation

  The infinite period Dividend Discount Model claims that the current price of a common stock is equal to D1 / (k - g), where D1 is next period's (most often next year's) dividend, k is the required rate of return, and g is the growth rate of dividends. The earnings multiplier model goes a step further by dividing both sides of the infinite period Dividend Discount Model equation by expected earnings during the next 12 months, yielding P/E = (D1/E) / (k - g). In this question, the P/ E ratio is equal to 0.65 / (0.15 - 0.06) = 7. 22.

• Question 1456:

  The net cash flow attributable to an investment project is known as which of the following terms?

  A. Sunk Cost
  B. Opportunity Cost
  C. Incremental Cash Flow
  D. Cannibalization E. Externality
  C. Incremental Cash Flow

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  Explanation

  Incremental cash flow is defined as the net cash flow attributable to an investment project.

• Question 1457:

  Historically, the EPS figure for a stock market series has been less volatile than the earnings multiplier for the same series. Which of the following best characterizes the primary reason for the greater volatility experienced by the earnings multiplier? Choose the best answer.

  A. None of these answers is correct.
  B. The EPS figure is less volatile due to accounting manipulations and the malleability of international and domestic accounting standards including GAAP.
  C. The price-to-earnings figure experiences a tax leveraging effect that is not passed on to the EPS figure.
  D. The earnings multiplier is more sensitive to fluctuations in the equity markets than is the EPS figure; i.e. the earnings multiplier is "forward looking."
  E. The price-to-earnings ratio is more sensitive to changes in the spread between the required rate of return and the anticipated future growth rate.
  F. The earnings multiplier is more sensitive to changes in dividend policies than is the EPS figure.
  E. The price-to-earnings ratio is more sensitive to changes in the spread between the required rate of return and the anticipated future growth rate.

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  Explanation

  The greater relative volatility of the earnings multiplier versus the EPS figure is primarily attributable to an increased sensitivity to changes in the spread between the required rate of return "k" and the anticipated growth rate "g." Remember that the equation used to determine the appropriate earnings multiplier for a stock market series is the following:

  {P/E = [D/E / (k - g)]}

  Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated growth rate of dividends.

  As you can see, changes in the spread between the required rate of return and the anticipated growth rate can have a dramatic effect on the earnings multiplier for a stock market series. While the earnings multiplier is sensitive to changes in the dividend payout ratio, volatility in this figure is not cause for the increased volatility of the earnings multiplier versus the EPS figure.

• Question 1458:

  Corporate directors are governed by the ________. Trustees are governed by the ________.

  A. none of these answers
  B. "common sense doctrine"; business judgment rule
  C. business judgment rule; Prudent Man Rule
  D. business judgment rule; "common sense doctrine"
  E. "common sense doctrine"; Prudent Man Rule
  F. Prudent Man Rule; business judgment rule
  G. Prudent Man Rule; "common sense doctrine"
  C. business judgment rule; Prudent Man Rule

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  Explanation

  This question is trying to highlight the different standards of business care fiduciaries must uphold in charitable organizations and trusts respectively. Thus, fiduciaries at charities are bound by the business judgment rule, since they are comparable to directors of business corporations. In contrast, trustees are governed by the Prudent Man Rule. This distinction in the standard duties applicable to fiduciaries in different situations should be recognized.

• Question 1459:

  The 8% McClintock bonds maturing in 10 years are currently trading at 97. 55. These bonds are option-free and pay coupons semiannually. Which of the following statements is most likely to be TRUE?

  A. The yield to maturity is greater than 8.0%.
  B. The current yield is less than 8.0%.
  C. The nominal yield is greater than 8.2%.
  A. The yield to maturity is greater than 8.0%.

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  Explanation

• Question 1460:

  Stargell Industries follows a strict residual dividend policy. The company has a capital budget of $3,000,000. It has a target capital structure, which consists of 30 percent debt and 70 percent equity. The company forecasts that its net income will be $3,500,000. What will be the company's expected dividend payout ratio this year?

  A. 40%
  B. 45%
  C. 30%
  D. 25%
  E. 35%
  A. 40%

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  Explanation

  Step 1 Find equity required to maintain capital budget:

  Capital budget$3,000,000

  % of budget financed with equityx 0.70

  $2,100,000

  Step 2 Calculate dividend:

  Earnings$3,500,000

  Less equity retained(2,100,000)

  Dividend$1,400,000

  Step 3 Find payout ratio:

  Dividend/Earnings = $1,400,000/$3,500,000 = 0.4000 = 40%.