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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1571:

  For a standard normal distribution what is the probability that z is greater than 1.75?

  A. 0.4599
  B. 0.0401
  C. None of these answers
  D. 0.9599
  E. 0.0459
  B. 0.0401

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  Explanation

  The area under the curve for z = 1.75 is 0.4599. Therefore, 0.4599*2 = 0.9198. We want z >1.75. So we want (1 - 0.9198)/2 = 0.0401.

• Question 1572:

  If you buy a house costing $120,000 and pay for it over 30 years, what is your monthly payment, if your loan's interest rate is 7% per year, compounded monthly and the first payment is due next month?

  A. $4,371.83
  B. $8,400.00
  C. $798.36
  D. $665. 30
  E. $804. 39
  C. $798.36

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  Explanation

  On the BAII Plus, press 360 N, 7 divide 12 = I/Y, 120000 PV, 0 FV, CPT PMT. On the HP12C, press 360 n, 7 ENTER 12 divide i, 120000 PV, 0 FV, PMT. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 1573:

  Use the table below to choose the correct answer.

  Time Period Actual Inflation 14 percent 24 percent 36 percent 48 percent

  According to the adaptive expectations hypothesis, at the beginning of period 3, decision makers would expect inflation during period 3 to be ________.

  A. 6 percent
  B. 5 percent
  C. 8 percent
  D. 4 percent
  D. 4 percent

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  Explanation

  Under the adaptive expectations hypothesis economic agents base their future expectations on actual outcomes observed during recent periods. Thus, the most recent periods suggest an inflation rate of 4 percent will persist in the future.

• Question 1574:

  A portfolio manager with Mally, Feasance, and Company is examining shares of Melton Industries, a large industrial firm. Assume the following information:

  Annual Dividend: $0.70

  EPS: $1.65

  Tax Rate: 35%

  Discount Rate: 13. 15%

  ROE: 16%

  Using this information, what is the expected growth rate of this firm? Assume that the discount rate, tax rate, and ROE are expected to remain stable.

  A. 11.59%
  B. 9.21%
  C. None of these answers
  D. 6. 79%
  E. 6. 00%
  F. 10.00%
  B. 9.21%

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  Explanation

  To calculate the dividend growth rate, assuming a stable ROE figure, use the following equation: {g = ROE(1 - Dividend Payout Ratio)}. While the ROE figure has been provided, the Dividend Payout Ratio must be calculated manually. To find the Dividend Payout Ratio, divide the annual dividend by the EPS figure, giving the following: {Dividend Payout Ratio = ($0.70/$1.65)}. From this equation, we determine that the Dividend Payout Ratio for this firm is 42. 42%. Imputing this figure into the Dividend Growth Rate Equation will yield a growth rate of 9.21% for this firm. As you can see, neither tax rates nor discount rates are incorporated into the calculation.

• Question 1575:

  ABC Company has consistently paid out 40% of its earnings in dividends. The company's return on equity is 16%. Calculate ABC's estimated dividend growth rate.

  A. 40%
  B. 16%
  C. 6. 4%
  D. 10.0%
  E. 12%
  F. 9.6%
  F. 9.6%

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  Explanation

  The estimated growth rate of dividends = (Retention Rate) x (Return on Equity). In this case, the estimated growth rate of dividends = 60% x 16% = 9.6%.

• Question 1576:

  Which of the following statements is most correct?

  A. All else being equal, an increase in a firm's fixed costs will decrease its degree of operating leverage.
  B. All of these statements are correct.
  C. Firms that have large fixed costs and low variable costs have a higher degree of financial leverage than do firms with low fixed costs and high variable costs.
  D. If a firm's net income rises 10 percent every time its EBIT rises 10 percent, this implies the firm has no debt outstanding.
  E. None of these statements are correct.
  D. If a firm's net income rises 10 percent every time its EBIT rises 10 percent, this implies the firm has no debt outstanding.

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  Explanation

  If no debt were used, there will be no interest charges, which is included in net income but not EBIT.

• Question 1577:

  Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock, which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Rollins is a constant growth firm, which just paid a dividend of $2. 00, sells for $27. 00 per share, and has a growth rate of 8 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bondyield-plus-risk- premium method to find k(s). The firm's net income is expected to be $1 million, and its dividend payout ratio is 40 percent. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 40 percent. What is Rollins' cost of retained earnings using the bond-yield-plus-risk-premium approach?

  A. 16. 6%
  B. 16. 0%
  C. 16. 9%
  D. 14. 1%
  E. 13. 6%
  B. 16. 0%

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  Explanation

  Cost of retained earnings (Bond yield plus risk premium approach): k(s) = 12. 0% + 4. 0% = 16. 0%.

• Question 1578:

  The P/E ratio of a stock equals 7. 1. The company has just released its earnings figures at $12. 20 per share. The firm's dividend payout ratio is 28%. If the current stock price is $100, what is its 1-year expected return under the Dividend Discount Model?

  A. 19.40%
  B. none of these answers
  C. 14. 83%
  D. 13. 65%
  A. 19.40%

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  Explanation

  It is important to remember that the P/E ratio is the ratio of the current stock price and next year's expected earnings. Therefore, the firm's expected earnings next year equal 100/7. 1 = $14. 09 per share. Since the current earnings equal $12. 2, the dividend growth rate equals (14. 09/12. 2 - 1) = 15. 45%.

  To get the 1-year expected return, first calculate the expected price next year. Under Dividend Discount Model, the P/E ratio remains constant if the firm makes no policy changes and there are no market disruptions. Therefore, price next year is expected to be $14. 09*(1 + 15. 45%)*7. 1 = $115. 45. The dividend next year equals $14. 09 * 0.28 = $3. 95 per share. Thus, 1-year expected return (capital gains + dividends) = (P1+D1)/Po = (115. 45 + 3. 95)/100 - 1 = 19.4%.

• Question 1579:

  A stockbroker placed the following order: 50 shares of Kaiser Aluminum preferred at $104 a share 100 shares of GTE preferred at $25 1/4 a share 20 shares of Boston Edison preferred at $9 1/8 a share What is the weighted mean price per share?

  A. $79.75
  B. $25. 25
  C. $103. 5
  D. None of these answers
  E. $42. 75
  D. None of these answers

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  Explanation

  (50*104)+(100*25. 25)+(20*9.125) = 7907. 5. Weighted mean is 7907. 5/170 = 46. 51

• Question 1580:

  The goal of an ideal inflation policy would be

  A. focusing on unemployment first
  B. minimizing average inflation
  C. keeping inflation stable
  D. growing the money supply at a constant rate
  E. driving the price level higher
  C. keeping inflation stable

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  Explanation

  Anticipated inflation, even at relatively high levels, is generally not problematic. Therefore an ideal inflation policy would attempt to keep inflation as predictable and as stable as possible. Of course, theideal inflation rate would be zero, but minimizing average inflation, with no attention paid to the variability, would not be helpful. In the U.S., for example, the Federal Reserve and the Treasury department are careful to broadcast the money supply, so that market participants can make as accurate an estimate of inflation as possible.