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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1581:

  Which of the following does not affect the growth rate of earnings and dividends of a stock?

  A. Changes in the dividend payout ratio
  B. Changes in the return on equity (ROE)
  C. Changes in the risk premium
  D. Changes in the earnings retention rate
  C. Changes in the risk premium

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  Explanation

  The growth rate is equal to the retention rate multiplied by the ROE. The retention rate is itself equal to one minus the dividend payout ratio. Changes in the risk premium affect the required rate of return on a stock. Changes in all these variables are used in the direction of change approach to estimate the earnings multiplier.

• Question 1582:

  Tracy company reports the following in its statement of cash flows:

  Net Income $1,000 Depreciation and Amortization 350 Decrease (Increase) in Accounts receivable (10) Decrease (increase) in inventory 200 Decrease (increase) in prepaid expenses 80 Increase (decrease) in trade payables (300) Increase (decrease) in taxes payable 75 Cash Flow from operations 1,395

  If Tracy shows depreciation expense of $275 in its income statement, cash paid for amortization is ________.

  A. $75
  B. $525
  C. not determinable
  D. $0
  D. $0

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  Explanation

  No cash outflow.

• Question 1583:

  The ________ Index is the ratio of Barron's average yield on 10 top grade corporate bonds to the yield on the Dow Jones average of 40 bonds.

  A. Dow-Barron
  B. Risk
  C. Confidence
  D. Bond Rating
  C. Confidence

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  Explanation

  By definition, the Confidence Index is the ratio of Barron's average yield on 10 top grade corporate bonds to the yield on the Dow Jones average of 40 bonds. This index measures the difference in yield spread between premium grade bonds with a large cross section of bonds.

• Question 1584:

  Which of the following are methods of estimating a company's Cost of Retained Earnings?

  I. CAPM

  II. CANSLIM

  III. DCF Method

  IV.

  Bond-Yield-plus-Risk-Premium

  V.

  Least Cost Debt vs. Equity

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

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  Explanation

  The Capital Asset Pricing Model (CAPM), Discounted Cash Flow (DCF method), and Bond-Yield-plus- Risk-Premium methods may all be used to estimate a firm's Cost of Retained Earnings.

• Question 1585:

  The mean, as a measure of central tendency would be inappropriate for which one of the following?

  A. Incomes of lawyers
  B. Number of pages in textbooks on statistics
  C. Ages of adults at a senior citizen center
  D. Marital status of college students at a particular university
  E. None of these answers
  D. Marital status of college students at a particular university

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  Explanation

  The answer to the question what is your marital status is usually yes or no, or some other status - divorced, widow etc. So we cannot take an average of non-ordinal observations.

• Question 1586:

  A firm has a high debt-to-equity ratio. In order to improve this ratio in earlier years, it will prefer:

  A. LIFO accounting and accelerated depreciation.
  B. LIFO accounting and straight-line depreciation.
  C. FIFO accounting and straight-line depreciation.
  D. FIFO accounting and accelerated depreciation.
  C. FIFO accounting and straight-line depreciation.

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  Explanation

  The company will use FIFO (assuming prices are increasing) and straight line depreciation to increase income and hence, retained earnings. This improves the debt-to-equity ratio.

• Question 1587:

  The equity turnover of a firm equals:

  A. asset turnover times financial leverage.
  B. asset turnover times financial leverage and sales to equity ratio.
  C. net income to equity ratio.
  D. sales to equity ratio.
  B. asset turnover times financial leverage and sales to equity ratio.

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  Explanation

  Equity Turnover = sales/equity = (sales/total assets)*(total assets/equity)= (asset turnover)*(financial leverage)

• Question 1588:

  If you deposit $345 into an account paying 5. 45% per year simple interest, how much interest will be earned after 10 months?

  A. $15. 67
  B. $360.67
  C. $188.03
  D. $$359.59
  E. $14. 59
  A. $15. 67

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  Explanation

  The question only asks for the earned interest, not the total amount in the account. On the BAII Plus, press 345 x 0.0545 x 10 divide 12 = to see the answer. On the HP12C, press 345 ENTER 0.0545 x 10 x 12 divide to see the answer.

• Question 1589:

  Firms in which of the following industries would likely have the highest earnings retention rate? Further, are firms in this industry are likely to be financed primarily through debt or equity?

  A. Media; debt
  B. Fiber optics networking; equity
  C. Fiber optics networking; debt
  D. Media; equity
  E. Computer manufacturing; debt
  F. Computer manufacturing; equity
  B. Fiber optics networking; equity

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  Explanation

  Of the industries listed, fiber optics networking would be expected to have the highest earnings retention rate. The fiber optics networking industry is characterized by a high degree of investment in research and development, along with a

  high growth rate and level of uncertainty. All of these factorsare conducive to a high retention rate, i.e. a low dividend payout ratio. Further, firms within industries associated with high growth rates and high levels of uncertainty are likely to be

  financed primarily with equity. This is reasoned by several factors, some of which include the following:

  Firms in new industries typically have a balance sheet weighted heavily toward intangible assets, which can neither be easily liquidated nor pledged as collateral for a loan.

  Firms in new industries are characterized by a high degree of research and development expenses.

  Equity provides firms in emerging industries with a higher degree of agility than debt financing.

  The cash flows of firms in developing industries are characterized by a high degree of uncertainty, which often prevents the reliable payment of debt obligations.

• Question 1590:

  The XYZ Company operates a catering service specializing in business luncheons for large businesses. XYZ requires customers to place their orders two weeks in advance of the scheduled events. XYZ bills its customers on the tenth day of

  the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, XYZ should recognize revenue from its catering services at the date when a ________.

  A. billing is mailed
  B. customer's payment is received
  C. customer places an order
  D. luncheon is served
  E. none of these answers
  D. luncheon is served

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  Explanation

  Revenues should be recognized when they are realized or realizable and earned. The most common time at which these two conditions are met is when the product or service is delivered.