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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1491:

  Given that the P/E ratio on a common stock is 12, the expected dividend payout ratio is 0.7, and the dividend growth rate is 6%, what is the required rate of return?

  A. 9.3%
  B. Not enough information
  C. 17. 4%
  D. 12. 5%
  E. 11.8%
  E. 11.8%

  ---

  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). Rearranging this results in k = (D1/E) / (P/E) + g. In this question the required rate of return is equal to 0.7/12 + 0.06 = 0.118 = 11.8%.

• Question 1492:

  The following information was taken from the accounting records of Boston Corp. for the year ended December 31, 1996 (in $000):

  Proceeds from issuance of preferred stock F$4,000 Dividends paid on preferred stock F400 Bonds payable converted to common stock NC2,000 Payment for purchase of machinery I500 Proceeds from sale of plant building I1,200 2% stock dividend on common stock NC300 Gain on sale of plant building I200 The net cash flows from investing and financing activities that should be presented on Boston's statement of cash flows for the year ended December 31, 1996 are, respectively (in $000) ________.

  A. $700 and $3,600
  B. $700 and $3,900
  C. $700 and $4,000
  D. $900 and $3,900
  E. $900 and $3,600
  A. $700 and $3,600

  ---

  Explanation

  Investing activities include the acquisition and disposal of all long-term assets. Thus, the purchase of machinery and sale of plant building for a total of $700 inflow from investing (-$500 + 1,200). Financing activities include the issuance and repurchase of shares, dividends and changes in long- term liabilities. In this case, the issuance of preferred stock and payment of dividends for a total of $3,600 inflow from financing ($4,000-400). The conversion of bonds into common stock and the stock dividend do not affect cash.

• Question 1493:

  The unemployment rate of teen-agers is substantially higher than the unemployment rate of prime-age workers primarily because teen-agers

  A. are more likely to be in the armed forces and therefore they end up being counted as unemployed.
  B. are less likely to be in the labor force than older workers since many teenagers are still attending school.
  C. are less likely to switch jobs and move into and out of the labor force than older workers.
  D. are more likely to switch jobs and move into and out of the labor force than older workers.
  E. if they search more diligently, can generally find high-paying jobs that are available only to experienced, highly skilled workers.
  D. are more likely to switch jobs and move into and out of the labor force than older workers.

  ---

  Explanation

  Youthful workers experience more unemployment because they change jobs and move in and out of the labor force often.

• Question 1494:

  Assume that a U.S. investor can invest in two asset classes: Domestic and Foreign Bonds. The data in the following table are risk and return data calculated in U.S. Dollar terms. Given this data, which of the following choices is most likely the correct risk/return combination for a portfolio weighted 50 percent in domestic bonds and 50 percent in foreign bonds?

  A. Risk of 7. 50%, Return of 8.25%.
  B. Risk of 8.00%, Return of 10.90%.
  C. Risk of 6. 00%, Return of 9.25%.
  D. Risk of 10.00%, Return of 13. 50%.
  C. Risk of 6. 00%, Return of 9.25%.

  ---

  Explanation

  According to portfolio theory and the principle of diversification, we would expect that adding more of a security that has a low correlation to an existing portfolio would lower the portfolio risk. Since the correlation between foreign and domestic bonds is low at 0.50, we would expect the risk of the portfolio to decline below 8.00% when we replace domestic bonds with foreign bonds. This narrows the possible correct responses to the two with risk less than 8.00%. In addition, we would expect the return to increase, as the return on foreign bonds is higher than that on domestic bonds, butremain slightly lower than that for the portfolio that is 20% domestic and 80% foreign. We can calculate the estimated portfolio return as the weighted average of returns for the individual asset classes. (0.50 * 12) + (0.50 * 6. 5) = 9.25%

• Question 1495:

  You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. The truck's basic price is $50,000, and it will cost another $10,000 to modify it for special use by your firm. The truck falls into the MACRS three-year class, and it will be sold after three years for $20,000. Use of the truck will require an increase in net working capital (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What is the net investment in the truck?

  A. -$65,000
  B. -$50,000
  C. -$52,600
  D. -$55,800
  E. -$62,000
  E. -$62,000

  ---

  Explanation

  Initial investment:

  Cost($50,000)

  Modification(10,000)

  Change in NWC(2,000)

  Total net investment =($62,000)

• Question 1496:

  An accelerated life test on a large number of type-D alkaline batteries revealed that the mean life for a particular use before they failed is 19.0 hours. The distribution of the lives approximated a normal distribution. The standard deviation of the distribution was 1.2 hours. About 95. 44 percent of the batteries failed between what two values?

  A. 16. 6 and 21.4
  B. 14. 1 and 22. 1
  C. 12. 2 and 14. 2
  D. None of these answers
  E. 8.9 and 18.9
  A. 16. 6 and 21.4

  ---

  Explanation

  9544/2 = 0.4772. For an area under the curve of 0.4772, the z value is (+/-)2. We know that z = (x-u)/sigma. Therefore, +/-2 = (x-19)/1.2. Rearranging we get x = u +/- z*sigma. So x = 19 +/- 2*1.2 = 19+/-2. 4. x is 16. 6 and 21.4.

• Question 1497:

  Everly Smith has passed Level II of the CFA examination. While studying for Level III, he circulates his resume stating that he has "completed Charter Financial Analyst II" and his resume lists his name as "Everly Smith, CFA II." Which of these following statements is correct?

  A. Everly Smith is not in compliance with the standards regarding use of the CFA designation. He may state he "completed Chartered Financial Analyst II," but cannot put "CFA II" after his name.
  B. Everly Smith is not in compliance with the standards regarding use of the CFA designation. He can neither state he "completed Chartered Financial Analyst II" nor "Everly Smith, CFA II."
  C. Everly Smith is not in compliance with the standards regarding use of the CFA designation. Since he is registered for Level III he should state "Everly Smith, CFA III."
  D. Everly Smith is in compliance with the standards regarding use of the CFA designation.
  B. Everly Smith is not in compliance with the standards regarding use of the CFA designation. He can neither state he "completed Chartered Financial Analyst II" nor "Everly Smith, CFA II."

  ---

  Explanation

  Everly Smith has violated Standard II (A), Use of Professional Designation. There is no designation for someone who has passed Level I, Level II, or Level III, so he may not state "Everly Smith, CFA II." He also can not state he has "completed Charter Financial Analyst II." However, he may state that he is a Level III candidate in the CFA Program. If he passed Level II, but was not registered for Level III he could state "I passed Level II of the CFA Program in the year 19-."

• Question 1498:

  Which of the following is NOT a revenue recognition method when there is uncertainty surrounding the realizability of income?

  A. Completed Contract Method
  B. Cost Recovery Method
  C. Installment Sales Method
  D. Real Estate Method
  A. Completed Contract Method

  ---

  Explanation

  The completed contract method is used for revenue recognition in the case of long-term contracts. In particular, it is chosen instead of the percentage-of-completion method if there are no reliable measures of the degree to which the contract obligations have been fulfilled.

• Question 1499:

  Unit labor cost varies

  A. positively with aggregate profit margin.
  B. logarithmically with aggregate profit margin.
  C. inversely with aggregate profit margin.
  D. convexly with aggregate profit margin.
  A. positively with aggregate profit margin.

  ---

  Explanation

  Finkel and Tuttle found that the capacity utilization rate, unit labor costs, rate of inflation, and foreign competition were the four major variables that affected the aggregate profit margin. Unit labor cost is most often the major variable cost for a firm. If it increases (holding sales revenues constant), one would expect the profit margin to decline.

• Question 1500:

  At the end of a fiscal period, any revenue that has been earned but the company has not received payment for should be debited to an appropriate

  A. asset account
  B. expense account
  C. liability account
  D. revenue account
  A. asset account

  ---

  Explanation

  Revenue should be recognized in the period in which it is earned and is credited to the appropriate revenue account. If payment has not been received, then a debit entry to Accounts Receivable must be booked.