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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1461:

  Which of the following best describes an balance sheet?

  A. None of these answers.
  B. It reports cash receipts and cash disbursements for a specific accounting period.
  C. It reports investment activities for a specified accounting period.
  D. It reports the amount and composition of assets and liabilities for a specific accounting period.
  E. It reports revenues and expenses for a specific accounting period.
  D. It reports the amount and composition of assets and liabilities for a specific accounting period.

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  Explanation

  A balance sheet provides a detailed listing of a company's assets, liabilities, and equity at a point in time. This provides a glimpse at a company's financial condition.

• Question 1462:

  The infinite period dividend discount model assumes that

  A. dividends grow at a constant rate, that constant rate will continue for an infinite period of time, and that the required rate of return on the stock is greater than the growth rate. Making these assumptions, the model states that the value of a stock is equal to the current dividend payment divided by the spread between the required rate of return and the growth rate of dividends.
  B. dividends grow at a constant or increasing rate, and that the required rate of return on the stock is greater than the growth rate. Making these assumptions, the model states that the value of a stock is equal to the dividend payout ratio divided by the spread between the required rate of return and the growth rate of dividends.
  C. dividends grow at a constant or increasing rate, and that the growth rate of dividends is higher than the required rate of return on the stock. Making these assumptions, the model states that the valueof a stock is equal to the dividend payout ratio divided by the spread between the required rate of return and the growth rate of dividends.
  D. dividends grow at a constant rate, and that constant rate will continue for an infinite period of time. Making these assumptions, the model states that the value of a stock is equal to the dividend payout ratio divided by the spread between the required rate of return and the growth rate of dividends.
  A. dividends grow at a constant rate, that constant rate will continue for an infinite period of time, and that the required rate of return on the stock is greater than the growth rate. Making these assumptions, the model states that the value of a stock is equal to the current dividend payment divided by the spread between the required rate of return and the growth rate of dividends.

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  Explanation

  The dividend discount model's fundamental assumption is that the value of a share of common stock is equal to the present value of all future dividends. The assumption that a firm's dividends grow at a constant rate for an infinite period of time is seldom true for companies growing at above-average rates. For example, although Intel and Wal-Mart have both grown at rates in excess of 30% a year for several years, it is doubtful that they will be able to maintain such high growth for an infinite period.

• Question 1463:

  Andy Pilling is a bond trading specialist who recently started a special fund, the "Structured Bond Fund." The strategy behind this fund is quite complex, involving a mix of highly speculative, high-yield bonds and various tax-free municipal bonds for some stability. Andy has a strong view that the economy will remain vibrant and bullish over the next two years and hence, is not worried about the risky bonds. Assuming a falling rate scenario in this case allows the fund to project an expected return 130 basis points above the SandP 500 return. In his special report, Pilling does not disclose such assumptions nor does he reveal any details about the bond strategy. He does analyze the state of the economy and the future outlook in the report. Based on his reputation and his association with some big name academics, Pilling is able to obtain capital of close to 75 million dollars on this fund alone. Andy has:

  A. not violated any standards in the AIMR Code of Ethics.
  B. violated Standard IV (B.6) - Prohibition Against Misrepresentation.
  C. violated Standard IV (A.2) - Research Reports - by not revealing the assumptions and details about the strategy.
  D. violated Standard IV (B.1) - Fiduciary Duties - by not disclosing the nature of the strategy.
  C. violated Standard IV (A.2) - Research Reports - by not revealing the assumptions and details about the strategy.

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  Explanation

  Standard IV (A.2) - Research Reports requires members to describe the basic characteristics of an investment, the degree of risks involved and scenario analysis to illustrate possible losses under different market conditions. By suppressing such relevant details, Pilling has violated the AIMR Code of Ethics.

• Question 1464:

  Which of the following measures can differ greatly among countries?

  A. Specific components of ROE
  B. Retention rates
  C. Total asset/equity ratios
  D. All of these answers
  D. All of these answers

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  Explanation

  The differences in retention rate or the components of ROE in different countries result from differences in accounting practices as well as alternative management performance or philosophy.

• Question 1465:

  According to SFAC 5, the condition(s) that must be met for revenue recognition to take place is

  A. the ability to measure the revenue amount.
  B. there must be no remaining significant contingent obligation that pertains to the sale.
  C. the verbal or written agreement of the sale.
  D. the ability to recognized when the revenue actually takes place.
  E. the completion of the earnings process and assurance of payment.
  E. the completion of the earnings process and assurance of payment.

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  Explanation

  The firm must have provided all or virtually all the goods/services for which it is to be paid and it must be possible to measure the total expected cost of providing these goods/services. Also, the seller must reasonably estimate the probability of nonpayment; if this cannot be assured, assurance of payment is not satisfied.

• Question 1466:

  Performance Presentation Standards state that subsectors of larger international composites may be used to create stand-alone composites only if the subsectors are managed as ________ entities.

  A. independent
  B. two
  C. unique
  D. separate
  D. separate

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  Explanation

  Subsectors or carve-outs of larger international composites may be used to create stand-alone composites only if the subsectors are managed as separate entities with their own cash allocations and currency management.

• Question 1467:

  Type II error refers to the event that we will:

  A. Fail to reject the null when it is false.
  B. Accept the alternative when it is false.
  C. Reject the null when it is true.
  D. Reject the alternative when it is true.
  A. Fail to reject the null when it is false.

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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.

• Question 1468:

  An fundamental analyst with Street Brothers asset management is considering shares of Polynomial Software Solutions, Inc., for possible investment. In her analysis, this investor has determined the following information:

  The Company currently pays a $2. 20 per share dividend, and this dividend is anticipated to grow at 13% annually. Additionally, the investor has assumed that she will be able to sell the stock for $125 per share at the end of four years. Similar investments have warranted a 15. 25% per year required rate of return. What is the value of Polynomial Software Solutions?

  A. $79.23
  B. $110.64
  C. $71.89
  D. $122. 16
  E. The Multiple Holding Period DDM will produce a nonsensical answer for this stock.
  A. $79.23

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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 fourth year, as this is the end horizon for this investors 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 = [($2. 20 * 1.13) / (1 + 0.1525)^1] + [($2. 486 * 1.13) / (1 + 0.1525)^2] + [($2. 80918 * 1.13) / (1 + 0.1525)^3] + [($3. 174373 * 1.13) / (1 + 0.1525)^4] + [$125 / (1 + 0.1525)^4]}

  Which breaks down into the following:

  {V = [$2. 15705 + $2. 114938 + $2. 073649 + $2. 033165 + $70.851048] = $79.23

• Question 1469:

  Which of the following methods for examining a project's stand-alone risk cannot be effectively conducted without the use of a random number generator? Choose the best answer.

  A. Probability Analysis
  B. More than one of these answers is correct
  C. Monte Carlo Regression
  D. Monte Carlo Simulation
  E. Scenario Analysis
  F. Sensitivity Analysis
  D. Monte Carlo Simulation

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  Explanation

  Monte Carlo Simulation seeks to examine the NPV of a project throughout a large series of possible values for input variables. When measuring stand-alone risk using Monte Carlo Simulation, the use of a computer and rather complex software package is necessary. In Monte Carlo Simulation, the expected ranges of input variables are specified, and random numbers are incorporated into the analysis function, producing a NPV value across a wide range of possible situations. Monte Carlo Simulation is so named because the technique evolved largely from methods used to analyze probabilities in casino gambling. Scenario analysis involves the establishment of a "best case" and "worst case" scenario, which is compared to a predetermined "base case." Sensitivity Analysis seeks to determine the sensitivity of a project's NPV to changes in specific input variables, and "Probability Analysis" can be conducted using simple statistical formulas. None of these three methods require the use of a random number generator.

• Question 1470:

  Relationships with and Responsibilities to Clients and Prospects are dealt with under:

  A. Standard I
  B. Standard III
  C. None of these answers
  D. Standard II
  E. Standard V
  F. Standard IV
  F. Standard IV

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  Explanation

  Relationships with and Responsibilities to Clients and Prospects are dealt with under Standard IV.