CFA Institute CFA Institute Certifications CFA-LEVEL-1 Questions & Answers

• Question 1581:

  Assuming all other factors remain unchanged, which one of the following would reduce the market P/E ratio?

  A. The market ROE is expected to increase.

  B. The dividend payout ratio increases.

  C. The dividend growth rate increases.

  D. The required rate of return increases.

  Correct Answer: D

  P/E = (dividend payout ratio) / (k - g) k = real rate + inflation = risk premium g = (ROE) (retention rate)

  a.

  ROE up, g up, P/E up; Payout up, P/E up;

  c.

  g up, k-g down, P/E up; k up, P/E down

• Question 1582:

  Which of the following statements is false?

  A. The price to book value ratio is seldom greater than one for industrial firms. This is caused by the fact that due to accounting rules book value will exceed market value in most firms.

  B. Since cash flows are more stable than earnings the price to cash flow ratio should be used in conjunction with the P/E ratio.

  C. Economic value added (EVA) is a present value technique used to measure management's ability over time to add value to the firm through their investment decisions.

  D. Market Value Added equals the market value of the firm's capital minus the adjusted book value of the firm's capital.

  Correct Answer: A

• Question 1583:

  Which of the following statements about interest rate swaps is false?

  A. The parties agreeing to swap cash flows are call the counter parties.

  B. Swap facilitators are the people who bring the counter parties together.

  C. A plain vanilla interest rate swap is a fixed rate for variable rate swap. The variable rate is usually set at LIBOR flat. The period of time involved in the swap is called the tenor.

  D. Notional principal is exchanged at initiation and termination while only net interest rate payments are exchanged on the settlement dates.

  Correct Answer: D

• Question 1584:

  You are analyzing a firm that has:

  If you think next year's earnings will be $4 per share, what value would you place on this stock?

  A. $22.24

  B. $26.67

  C. $33.32

  D. $45.45

  Correct Answer: C

  Explanation:Dividend payout = 1 - earnings retention rate = 1 - .4 = .6 =+ B(-) = .06 + 1.2(.11 - .06) = .12 g = (retention rate)(ROE) = (.4)(.12) = .048 P/E = (div payout rate)/(k - g) = .6/(.12 - .048) = 8.33 Price = (E)(P/E) = (4)(8.33) = 33.32

• Question 1585:

  Cavanaugh's stock will start paying a $2 per share dividend four years from today (D4). Analysts are estimating at that time Cavanaugh's dividend growth rate will stabilize at 7%. If investors want to earn 12% on investments of this type, what value would they put on Cavanaugh shares today?

  A. $28.47.

  B. $31.89.

  C. $40.00.

  D. $50.18.

  Correct Answer: A

  Explanation:

  P3 = D4 / (k – g) = 2 / (.12 - .070 = $40P0 = [n = 3; i = 12; FV = 40] = $31.89

• Question 1586:

  Nina Foch, CFA, is considering investing in an exchange traded fund (ETF). However, she is unsure how the ETF compares to open-end and closed-end funds. Which of the following statements comparing ETFs with open-end and closed- end funds is least likely to be true?

  A. ETF shares can be sold short, while open-end fund shares cannot be shorted.

  B. The legal structure of an ETF is similar to a closed-end fund.

  C. ETF shares trade like closed-end fund shares.

  Correct Answer: B

• Question 1587:

  Ann Fowler, CFA, has a client that wants to invest in hedge funds. Fowler recommends the client invest in

  a Fund of Funds (FOF), which will invest in a variety of hedge funds. Fowler makes the following

  statements:

  Statement 1:Investing in several different types of hedge funds will reduce risk compared to investing in a

  single fund.

  Statement 2:An important part of the selection process is due diligence to resolve any transparency issues.

  Which statements are correct?

  A. Only statement 1 is correct.

  B. Only statement 2 is correct.

  C. Both statements 1 and 2 are correct.

  Correct Answer: A

• Question 1588:

  There are two stocks in an index:

  Nothing has changed except now the price of Company A's stock is selling for $4 per share. What is the

  price-weighted index and what is the value-weighted index?

  A. Price-weighted = 8; Value-weighted =2.00

  B. Price-weighted = 10; Value-weighted = 1.25

  C. Price-weighted = 7; Value-weighted = 1.50

  D. Price-weighted = 6; Value-weighted = 0.95

  Correct Answer: C

  Price weight = [(4) + (10)] / 2 = 7

• Question 1589:

  An investor buys 200 shares of ABC at the market price of $100 on full margin. The initial margin requirement is 40 percent and the maintenance margin requirement is 25 percent. What is the leverage factor of the margin purchase?

  A. 2.50.

  B. 0.40.

  C. 0.60.

  D. 4.00.

  Correct Answer: A

  The leverage factor is 1/initial margin requirement, 1/0.4 = 2.50.

• Question 1590:

  Which of the following regarding bond market indexes is FALSE?

  A. Unlike stocks, bonds lack continuous price trading data.

  B. The bond universe is more stable than the stock universe.

  C. There are more bond issues than stocks.

  D. The price volatility of bonds is constantly changing due to the influence of maturity and market yield on bond durations.

  Correct Answer: B