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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1661:

  Stockholders' Equity is

  A. all of these answers
  B. the financial obligations of the company
  C. the rights to the assets of the business once the liabilities have been met
  D. assets plus liabilities
  C. the rights to the assets of the business once the liabilities have been met

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  Explanation

  The accounting equation shows us that the Assets (Own) are equal to the Liabilities (obligations) plus the Stockholders' Equity.

• Question 1662:

  Consider the following annual growth forecasts for a common stock:

  Growth in years 1-2 = 25%

  Growth in years 3-4 = 15%

  Growth after year 4 = 10%

  Assuming that the last dividend was $1.30 per share, and that the required rate of return is 14% per year, what is the value of this common stock?

  A. $34. 54
  B. $28.28
  C. $46. 90
  D. The answer cannot be determined from the information provided.
  E. $49.90
  F. None of these answers is correct.
  E. $49.90

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  Explanation

  To determine the value of a common stock experiencing temporary supernormal growth, use the following equation:

  {V = {[d0 * (1 + gs)^1] / k} + {[d1 * (1 + gs)^2} + ... {dn * (1 + gs)^n} + {[dn * (1 + gs)^n * (1 + gn] / (k - g)}/ (1 + k)^n}}

  Where: V = the value of common stock at t0, d0 = the dividend at t0, d1 = the dividend at t1, dn = the dividend at tn, gs = the supernormal rate of growth, gn = the normal rate of growth, n = the time period "n", and k = the required rate of

  return.

  In this example, there is a transitional growth period of two years, during which the growth rate of this stock is expected to grow at 15% annually. This period will follow the two-year supernormal growth period, and would be denoted as "g

  subset t" if we were to reproduce the equation illustrated above. The calculation of the value of this common stock is illustrated as follows:

  {V = {[$1.30 * (1.25)^1] / (1.14)} + {[$1.30 * (1.25)^2] / (1.14)^2} + {[$1.30. * (1.25)^2 * (1.15)^1] / (1.14)^3} + {[$1.30 * (1.25)^2 * (1.15)^2] / (1.14)^4} + {{[$1.30 * (1.25)^2 * (1.15)^2 * (1.10)^1]/ (0.14 - 0.10)}/ (1.14)^4}

  Which can be deduced to the following:

  {V = [$1.425439 + $1.562981 + $1.576691 + $1.590522 + $43. 739352] = $49.89}

• Question 1663:

  The cash flow statement provides more objective information about all of the following, except

  A. trends in cash flow components.
  B. management decisions regarding financial policy, dividend policy, and investment for growth.
  C. a firm's ability to generate cash flows from operations.
  D. cash consequences of investing and financing decisions.
  E. the amount a firm can be leveraged.
  E. the amount a firm can be leveraged.

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  Explanation

  In this case balance sheet data must be used to determine the answer.

• Question 1664:

  Eric Webb, an individual investor in a high tax bracket, would like to purchase a 5-year zero-coupon security with no credit risk. His investment adviser has recommended U.S. Treasury STRIP securities, and has told Webb that either coupon strips or principal strips would meet his needs. Which of the following statements is TRUE regarding the investment adviser's recommendation?

  A. While principal strips have no credit risk, there is credit risk in coupon strips.
  B. The adviser should have informed Webb that the principal strips have higher reinvestment risk than the coupon strips.
  C. The adviser should have informed Webb that STRIP securities may have negative tax consequences related to accrued interest.
  C. The adviser should have informed Webb that STRIP securities may have negative tax consequences related to accrued interest.

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  Explanation

• Question 1665:

  Which of the following could decrease outstanding capital stock?

  A. The exercise of warrants.
  B. All of these answers.
  C. The retention of earnings.
  D. The payment of a cash dividend.
  E. The purchase of treasury stock.
  E. The purchase of treasury stock.

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  Explanation

  Only the purchase of treasury stock would cause a firm's capital stock account to decrease because the firm acquires outstanding shares and immediately retires these shares.

• Question 1666:

  The prevailing budget philosophy prior to Keynes called for a balanced budget. Keynes argued that the government's tax and spending policies should be determined by the

  A. demand requirements necessary to attain full employment of resources.
  B. public's willingness to accept or reject tax changes.
  C. size and quality of the labor force.
  D. demand for public goods.
  D. demand for public goods.

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  Explanation

  Keynesian economists suggest that the government should operate under budget deficits when the economy is in a recession and under a surplus when the economy is growing very quickly. The consequence of this "counter-cyclical" policy will be a stabilization of the economy orchestrated through the government's contribution to aggregate demand. The government should attempt to stabilize the economy through its contribution to aggregate demand.

• Question 1667:

  Which of the following statements is most correct? The modified IRR (MIRR) method:

  A. All of these answers are correct.
  B. Calculates a return that is always less than the regular IRR.
  C. Overcomes the problem of multiple rates of return.
  D. Always leads to the same ranking decision as NPV for independent projects.
  C. Overcomes the problem of multiple rates of return.

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  Explanation

  MIRR assumes that cash flows from all projects are reinvested at the cost of capital, while the regular IRR assumes that the cash flows from each project are reinvested at the project's own IRR. The MIRR is a better indicator of profitability because reinvestment at the cost of capital is generally more correct.

• Question 1668:

  Composite Software, Inc. is anticipated to experience temporary supernormal growth of 40% per year for the next two years. After this supernormal growth period has passed, the growth rate of Composite Software is anticipated to experience a two-year transition phase of 25% per year growth. Following this transition phase, the growth rate of Composite Software is expected to stabilize at 15% annually. The Company currently pays a dividend of $0.10 per share, and the required rate of return is 18% per year. What is the value of Composite Software common stock?

  A. $6. 62
  B. $23. 83
  C. $14. 15
  D. $6. 03
  E. None of these answers is correct.
  A. $6. 62

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  Explanation

  To determine the value of a common stock experiencing temporary supernormal growth, use the following equation:

  {V = {[d0 * (1 + gs)^1] / k} + {[d1 * (1 + gs)^2} + ... {dn * (1 + gs)^n} + {[dn * (1 + gs)^n * (1 + gn] / (k - g)}/ (1 + k)^n}} Where: V = the value of common stock at t0, d0 = the dividend at t0, d1 = the dividend at t1, dn = the dividend at tn, gs = the

  supernormal rate of growth, gn = the normal rate of growth, n = the time period "n", and k = the required rate of return.

  In this example, there is a transitional growth period of two years, during which the growth rate of Composite Software is expected to grow at 25% annually. This period will follow the two-year supernormal growth period, and would be denoted

  as g subset t. The calculation of the value of this common stock is illustrated as follows:

  {V = {[$0.10 * (1.40)^1] / (1.18)} + {[$0.10 * (1.40)^2] / (1.18)^2} + {[$0.10 * (1.40)^2 * (1.25)^1] / (1.18)^3} + {[$0.10 * (1.40)^2 * (1.25)^2] / (1.18)^4} + {{[$0.10 * (1.40)^2 * (1.25)^2 * (1.15)^1]/ (0.18 - 0.15)}/ (1.18)^4}

  Which can be deduced to the following series of discounted cash flows:

  {V = [$0.118644 + $0.140764 + $0.149115 + $0.15796 + $6. 055146] = $6. 62}

• Question 1669:

  The assumptions underlying technical and fundamental analysis differ in many respects. Which of the following is an important difference between technical analysis and fundamental analysis? Choose the best answer.

  A. None of these answers is correct.
  B. All of these choices are important differences between technical analysis and fundamental analysis.
  C. Technical analysis assumes that securities "price in" information immediately, whereas fundamental analysts assume that securities markets "price in" information gradually.
  D. Technical analysis assumes that the Weak Form of the Efficient Market Hypothesis is correct, whereas fundamental analysis assumes that it is incorrect.
  E. Technical analysis is not reliant on financial statements whereas fundamental analysis is heavily reliant on financial statements.
  E. Technical analysis is not reliant on financial statements whereas fundamental analysis is heavily reliant on financial statements.

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  Explanation

  Of all the differences between technical analysis and fundamental analysis, perhaps the most important is the fact that technical analysis assumes that securities markets are not weak form efficient, whereas fundamental analysis assumes that the Weak Form of the EMH is correct. Technical analysts assume that securities markets will "price-in" relevant information gradually, and that securities prices follow observable trends and patterns. Fundamental analysts, on the other hand, generally assume that past price information cannot be used to predict movements in securities prices.

• Question 1670:

  A(n) ________ is someone who has knowledge of pending or actual investment recommendations or action.

  A. covered person
  B. none of these answers
  C. AIMR member
  D. insider
  A. covered person

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  Explanation

  Access or covered persons have knowledge of pending or actual investment recommendations or action. The firm's definition of access (covered) person should be broad enough to cover all people with that knowledge.