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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 151:

  Which of the following statements is most correct?

  A. If Congress cuts the capital gains rate, but leaves the personal tax rate unchanged, then this would provide an incentive for companies to increase their dividend payouts.
  B. If a firm follows a residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm's dividend payout.
  C. None of these answers are correct.
  D. Despite its drawbacks, a residual dividend policy is an effective way to stabilize dividend payouts, which makes it easier for firms to attract a clientele which prefers high dividends.
  E. All of these answers are correct.
  B. If a firm follows a residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm's dividend payout.

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  Explanation

  The residual dividend model is a model in which the dividend paid is set equal to the actual earnings minus the amount of retained earnings necessary to finance the firm's optimal capital budget. Ther esidual dividend policy minimizes the costs to the company of raising outside funds, but it does not provide a stable cash flow to the investors and most investors prefer stable dividends.

• Question 152:

  According to the hierarchy of accounting qualities, which of the following is considered a pervasive constraint?

  A. Timeliness
  B. Benefits versus costs
  C. Verifiability
  D. Conservatism
  E. Relevance
  B. Benefits versus costs

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  Explanation

  All accounting information is subject to two quantitative constraints: materiality and cost/benefit. The constraint of benefit/cost states that the benefits of information must exceed the cost of obtaining it.

• Question 153:

  An analyst with Churn Brothers Brokerage is examining shares of the common stock of Nexis Pharmaceuticals. Consider the following information about Nexis' common stock:

  Price per share: $98.73 Last dividend per share: $1.30 Expected growth rate: 12% per year Required return: 11% per year

  What is the value of Nexis' common stock? Choose the best answer.

  A. $130
  B. The Infinite Period DDM will produce a nonsensical answer in this case.
  C. $146
  D. $110
  E. $89
  B. The Infinite Period DDM will produce a nonsensical answer in this case.

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  Explanation

  The Infinite Period DDM will produce a nonsensical answer in this case because the required rate of return is less than the growth rate. This will lead to a negative answer for the value of Nexis Pharmaceutical common stock! The following

  equation illustrates the Infinite Period DDM:

  {P0 = [D1 / (k - g)]}

  Where: P0 = the price of the common stock at t0, D1 = the annual dividend at t1 (this is found by multiplying the dividend at t0 by (1 + expected growth rate), k = the required rate of return, and g = the anticipated growth rate.

  As you can see, the Infinite Period DDM should not be used in this case, because the annual growth rate is in excess of the required rate of return. In this instance, the analyst should first reexamine his figures for the growth rate and required

  rate of return. If these figures are indeed accurate, then another method should be used to value the stock.

• Question 154:

  International funds

  A. typically have one-half of their portfolios invested in the U.S.
  B. typically have one-fifth of their portfolios invested in the U.S.
  C. do not invest any portion of their portfolios in the U.S.
  D. typically have two-thirds of their portfolios invested in the U.S.
  E. typically have one-third of their portfolios invested in the U.S.
  C. do not invest any portion of their portfolios in the U.S.

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  Explanation

  An International fund is a type of foreign fund that only invests in non-U.S. securities. The international investment opportunities provided by this type of fund give American investors an added level of diversification.

• Question 155:

  Melinda May, a quantitative analyst with Smith, Kleen, and Beetchnutty Brokerage, has been instructed to perform a statistical analysis to test whether the earnings of biotechnology companies are negatively related to the growth of generic drug consumption. Ms. May begins her analysis by formulating and stating a hypothesis. Next, Melinda proceeds with an identification of the appropriate test statistic and its probability distribution. Now that the first two steps in the hypothesis testing process have been completed, Ms. May should proceed with which of the following? Choose the best answer.

  A. Evaluating the goodness of fit
  B. None of these answers is correct
  C. Specifying the significance level
  D. Stating the decision rule
  E. Collecting the data and performing the calculations
  F. Determining the p-value
  C. Specifying the significance level

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  Explanation

  Hypothesis testing involves a series of seven explicit steps:

  Step 1: Formulating and stating the hypothesis Step 2: Identifying the appropriate test statistic and its probability distribution Step 3: Specifying the significance level Step 4: Stating the decision rule Step 5: Collecting the data and performing the necessary calculations Step 6: Making the statistical decision Step 7: Making the economic/investment decision.

  In this example, Melinda May, a quantitative analyst, has begun her analysis by completing the first two steps in the hypothesis testing process. Now that the hypothesis has been stated and the appropriate test statistic has been calculated, Ms. May should proceed with a determination of the significance level, which is denoted by the Greek letter alpha. Remember that the significance level is equal to the probability of a Type I error, which is defined as incorrectly rejecting the null hypothesis. Subtracting the significance level from the number one will yield the confidence interval.

• Question 156:

  A cumulative frequency distribution on days absent during a calendar year by employees of a manufacturing company is shown below.

  Days AbsentCumulative Number of Employees 0 - 260 3 - 531 6 - 814 9 - 116 12 - 142

  How many employees were absent fewer than six days?

  A. 60
  B. 91
  C. 46
  D. 31
  E. None of these answers
  C. 46

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  Explanation

  This is the difference between the cumulative numbers for the 0-2 group and the 6-8 group, 60 - 14 = 46. There are 46 people between those two groups and they were absent fewer than six days.

• Question 157:

  Ben Click is analyzing an equity security using price-to-earnings, price-to-sales, price-to-book value, and price-to-cash flow ratios. Which statement correctly identifies a drawback of using one of the listed ratios?

  A. Earning power is a chief driver of investment value.
  B. Accounting effects may compromise the use of book value.
  C. Sales are generally less subject to distortion or manipulation than are other fundamentals.
  B. Accounting effects may compromise the use of book value.

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  Explanation

• Question 158:

  The earnings multiplier of a stock

  A. is determined by the expected dividend payout ratio, the return on capital, and the expected growth rate of dividends for that stock. The earnings multiplier tends to be rather stable between stocks and industries, and does not vary significantly over time.
  B. is determined by the expected dividend payout ratio, the required rate of return, and the expected growth rate of dividends for that stock. The earnings multiplier tends to vary considerably between stocks and industries, and over time.
  C. is determined by the expected earnings, the required rate of return, and the expected growth rate of dividends for that stock. The earnings multiplier tends to vary between stocks and industries, but is rather stable over time.
  D. is determined by the expected dividends, the required rate of return, and the expected growth rate of dividends for that stock. The earnings multiplier tends to vary considerably between stocks and industries, and over time.
  B. is determined by the expected dividend payout ratio, the required rate of return, and the expected growth rate of dividends for that stock. The earnings multiplier tends to vary considerably between stocks and industries, and over time.

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  Explanation

  The earnings multiplier (or price/earnings ratio) is equal to the expected dividend payout ratio, divided by the spread between the required rate of return and growth rate of dividends on the stock. Estimation of the earnings multiplier is important because it varies between stocks and industries as well as over time. It, along with future earnings, is used to estimate the future market value of stocks or stock market series.

• Question 159:

  A cash flow statement using the indirect method

  A. is as informative as using the direct method.
  B. begins with a firm's cash collections.
  C. uses major categories of gross cash receipts and payments.
  D. provides little new information into a firm's cash-generating ability.
  D. provides little new information into a firm's cash-generating ability.

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  Explanation

  Because of the indirect format, it is not possible to compare operating cash inflows and outflows by function with the revenue and expense activities that generated them.

• Question 160:

  Structural unemployment is a result of

  A. not enough employees to fill available jobs.
  B. inaccurate and/or costly information about job opportunities.
  C. insufficient employment in the building trades.
  D. an inadequate matching of qualified workers and available jobs.
  D. an inadequate matching of qualified workers and available jobs.

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  Explanation

  Structural unemployment occurs because there are structural characteristics of the economy that make it difficult for job seekers to find employment and employers to hire workers. Basic structural characteristics of the economy make it

  difficult for employees and employers to "match up."

  Unemployment due to this structure of the economy, means that unemployed workers do not possess the skills necessary to fill available jobs.