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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1651:

  Stock splits have the following effects on the financial statements except:

  A. the account title for common stock changes to reflect the change in the par value of stock
  B. contributed capital and retained earnings are unchanged
  C. disclosures about the stock on the balance sheet are changed to reflect the additional outstanding shares and the revised par value per share
  D. the shareholder's percentage interest in the corporation is changed by the percentage change in the market value of the stock
  D. the shareholder's percentage interest in the corporation is changed by the percentage change in the market value of the stock

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  Explanation

  The shareholder's percentage interest in the corporation is unchanged.

• Question 1652:

  Which of the following is not one of the three direct variables that affect an economy's real growth rate?

  A. Technological progress
  B. Growth rate of the labor force
  C. Growth rate of labor productivity
  D. Growth rate of the average number of hours worked
  A. Technological progress

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  Explanation

  While technological progress is exceedingly important to an economy's real growth rate, its effect is always indirect. Technological progress most often increases labor productivity, which in turn increases the real growth rate.

• Question 1653:

  What monthly payment, beginning next month, is required over the next 48 months to pay off a $10,000 debt today, if interest is charged at 10% per year, compounded monthly?

  A. $253. 63
  B. $266. 67
  C. $216. 02
  D. $270.54
  E. $400.54
  A. $253. 63

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  Explanation

  On the BAII Plus, press 48 N, 10 divide 12 = I/Y, 10000 PV, 0 FV, CPT PMT. On the HP12C, press 48 n, 10 ENTER 12 divide i, 10000 PV, 0 FV, PMT. Make sure the BAII Plus has the P/Y value set to 1.

• Question 1654:

  The management of Clay Industries have adhered to the following capital structure: 50% debt, 35% common equity, and 15% preferred equity. The following information applies to the firm:

  Before-tax cost of debt = 9.5%

  Combined state/federal tax rate = 35%

  Expected return on the market = 14. 5%

  Annual risk-free rate of return = 6. 25%

  Historical Beta coefficient of Clay Industries Common Stock = 1.24

  Annual preferred dividend = $1.55

  Preferred stock net offering price = $24. 50

  Expected annual common dividend = $0.80

  Common stock price = $30.90

  Expected growth rate = 9.75%

  Subjective risk premium = 3. 3%

  Given this information, and using the Bond-Yield-plus-Risk-Premium approach to calculate the component cost of common equity, what is the Weighted Average Cost of Capital for Clay Industries?

  A. 9.79%
  B. 8.36%
  C. 9.82%
  D. 6. 93%
  E. 8.52%
  F. The WACC for Clay Industries cannot be calculated from the information.
  E. 8.52%

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  Explanation

  The calculation of the Weighted Average Cost of Capital is as follows: {fraction of debt * [yield to maturity of outstanding long-term debt][1-combined state/federal income tax rate]} + {fraction of preferred stock * [annual dividend/net offering price]} + {fraction of common stock * cost of equity}. The cost of common equity can be calculated using three methods, the Capital Asset Pricing Model (CAPM), the Dividend-Yield-plus-Growth-Rate (or Discounted Cash Flow) approach, and the Bond- Yield-plus-Risk-Premium approach. In this example, you are asked to calculate the cost of common equity using the Bond-Yield-plus-Risk-Premium approach. To calculate the cost of equity using this approach, take the yield to maturity on the firm's outstanding debt (9.5%) and add a subjective risk premium (3. 3%), which gives a cost of common equity of 12. 8%. The after-tax cost of debt can be found by multiplying the yield to maturity on the firm's outstanding longterm debt (9.5%) by (1-tax rate). Using this method, the after-tax cost of debt is found as 6. 175%. The calculation of the cost of perpetual preferred stock is relatively straightforward, simply divide the annual preferred dividend by the net offering price. Using this method, the cost of preferred stock is found as 6. 327%. Incorporating these figures into the WACC equation gives the answer of 8.516%.

• Question 1655:

  A population consists of all the weights of all defensive tackles on Sociable University's football team. They are: Johnson, 204 pounds; Patrick, 215 pounds; Junior, 207 pounds; Kendron, 212 pounds; Nicko, 214 pounds; and Cochran, 208 pounds. What is the population standard deviation (in pounds)?

  A. About 4
  B. None of these answers
  C. About 40
  D. About 100
  E. About 16
  A. About 4

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  Explanation

  Population variance = (Sum of squared deviation from the mean)/N. The mean is 210. Population variance = (36 + 25 + 9 + 4 + 16 + 4)/6 = 94/6 = 15. 67. Population standard deviation is the square root of the population variance = 3. 958. xx-mean(x-mean)^2 204-636 215525 207-39 21224 214416 208-24

• Question 1656:

  Given that next period's dividend will be $2. 50, the growth rate of dividends is 7%, and the risk premium on the common stock is 11%, using the infinite period Dividend Discount Model, what is the current value of the common stock?

  A. $38.52
  B. Not enough information
  C. $62. 50
  D. $22. 73
  E. $18.94
  B. Not enough information

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  Explanation

  The infinite period Dividend Discount Model postulates that the current value of a common stock is equal to D1 / (k - g), where D1 is next period's dividend, k is the required rate of return, and g is the growth rate of dividends. In order to solve for the current value, the required rate of return on the common stock must be known. But only the risk premium is known, which, without the risk-free rate, cannot be used to derive the required rate of return

• Question 1657:

  Under the AIMR Code of Ethics, members shall practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their ________.

  A. families
  B. employer
  C. public contacts
  D. profession
  E. none of these answers
  D. profession

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  Explanation

  In accordance with the Standards, members will also strive to maintain and improve their competence and the competence of others in the profession.

• Question 1658:

  Which of the following is an operating cash flow?

  A. Dividends paid out to shareholders.
  B. Dividends received on investments in stocks.
  C. All of these answers.
  D. Cash used to replace the machine tool used in operational activities.
  B. Dividends received on investments in stocks.

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  Explanation

  Dividends received on investments in stocks are classified as operating cash flows while dividends paid out to shareholders are financing cash flows. Cash used to replace the machine tool used in operational activities is an investing cash flow.

• Question 1659:

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

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

  How many employees were absent between 3 and 5 days?

  A. 29
  B. 17
  C. 14
  D. 31
  E. 2
  B. 17

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  Explanation

  To find the number of people absent between 3-5 days, we need to get the difference in the cumulative number of employees between the 3-5 days group and the group after it, the 6-8 group. So we have 31 - 14 = 17.

• Question 1660:

  You are evaluating 5 portfolio managers (A, B, C, D, and E) whose Sharpe ratios are 0.25, 0.41, 0.92, 0.78, and 0.51, respectively. Which manager would most risk-averse investors prefer?

  A. C.
  B. A.
  C. E.
  D. None of these answers is correct.
  A. C.

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  Explanation

  The Sharpe measure of risk-adjusted performance is equal to (rbar_p - rbar_f)/sigma_p, where rbar_p is the mean portfolio return, rbar_f is the mean risk-free return, and sigma_p is the standard deviation of portfolio return. Thus, the manager with the highest Sharpe ratio is generating the largest return in excess of the risk free rate, per unit of risk assumed. This is manager C, with a Sharpe ratio of 0.92.