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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1731:

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

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

• Question 1732:

  Consider the following three investments:

  Future valueyearsinterest rate 1.$50,000 89% per year 2. $20,000 612% per year 3. $35,000 37% per year

  The present values of the 3 investments are:

  A. $28,193, $12,145, $31,422
  B. $99,628, $39,476, $42,877
  C. $25,093, $10,133, $28,570
  D. $24,192, $11,876, $27,864
  C. $25,093, $10,133, $28,570

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  Explanation

  Future value = Present value*(1+r)^N for annual compounding. Therefore,

  Future valueyearsratePresent Value 1.50,000 89% 50,000/(1.09)^8 = 25,093 2. 20,000 612% 20,000/(1.12)^6 = 10,133 3. 35,000 37% 35,000/(1.07)^3 = 28,570

  Note that the future value must always be greater than the present value.

• Question 1733:

  Deposits denominated in U.S. dollars at banks and other financial institutions outside the U.S. are known as ________.

  A. Federal reserves
  B. Money market deposit accounts
  C. Foreign bank reserves
  D. Fiat money
  E. Eurodollar deposits
  E. Eurodollar deposits

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  Explanation

  Although this name originated because of the large amounts of such deposits held at banks in Western Europe, similar deposits in other parts of the world are also called Eurodollars.

• Question 1734:

  In the simple Keynesian model, if equilibrium output is less than the level required for full employment, what must happen for full employment to be achieved?

  A. Aggregate demand must fall.
  B. Interest rates must rise.
  C. Aggregate supply must increase.
  D. Prices must rise.
  E. Aggregate demand must increase.
  E. Aggregate demand must increase.

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  Explanation

  When equilibrium output is less than the economy's capacity, only an increase in expenditures will lead to full employment. This is because under the Keynesian model, aggregate expenditures are considered the catalyst the change in output; that is, aggregate output is accommodative of aggregate expenditures.

• Question 1735:

  James Fry, CFA, is evaluating the potential investment merit of Cushing Corporation. Cushing's most recent year's earnings were S5. 00 per share, and Cushing paid a dividend of $1.50 per share. Fry forecasts that Cushing will cam $4. 70 per share next year. Fry estimates Cushing's future growth rate will be 10%, with a required rate of return of 12%. Based on the information provided, calculate Cushing's leading price to earnings (P/E) ratio. If the required rate of return is increased, indicate whether Cushing's P/E ratio will be higher or lower.

  A. The P/E ratio is 15. 0 and an increase in the required rate of return would results in a higher P/E ratio.
  B. The P/E ratio is 15. 0 and an increase in the required rate of return would result in a lower P/E ratio.
  C. The P/E ratio is 17. 6 and an increase in the required rate of return would result in a lower P/E ratio.
  C. The P/E ratio is 17. 6 and an increase in the required rate of return would result in a lower P/E ratio.

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  Explanation

• Question 1736:

  A firm has a dividend growth rate of 4. 3%. It typically pays out 45% of its earnings as dividends. Recently, it paid out $1.2 per share dividend and the required rate of return on its stock is 12. 6%. The firm's return on equity equals ________.

  A. 7. 82%
  B. none of these answers
  C. 9.56%
  D. 12. 60%
  A. 7. 82%

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  Explanation

  The dividend growth rate equals the product of ROE and the earnings retention ratio. The earnings retention in this case equals 1 - 0.45 = 0.55. Hence, the ROE equals 4. 3%/0.55 = 7. 82%.

• Question 1737:

  Doherty Industries wants to invest in a new computer system. The company only wants to invest in one system, and has narrowed the choice down to System A and System B. System A requires an up-front cost of $100,000 and then generates positive after-tax cash flows of $60,000 at the end of each of the next two years. The system can be replaced every two years with the cash inflows and outflows remaining the same. System B also requires an up-front cost of $100,000 and then generates positive after-tax cash flows of $48,000 at the end of each of the next three years. System B can be replaced every three years, but each time the system is replaced, both the cash inflows and outflows increase by 10 percent. The company needs a computer system for the six years, after which time the current owners plan on retiring and liquidating the firm. The company's cost of capital is 11 percent. What is the NPV (on a six-year extended basis) of the system, which creates the most value to the company?

  A. $31,211.52
  B. $103,065. 82
  C. $17,298.30
  D. $38,523. 43
  E. $22,634. 77
  A. $31,211.52

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  Explanation

  To find the NPV of the system we must use the replacement chain approach. Time System ASystem B 0-100,000-100,000 160,00048,000 260,000 - 100,000 = -40,00048,000 360,00048,000-110,000 =-62,000 460,000 - 100,000 = -40,00052,800 560,00052,800 660,00052,800 Use the CF key to enter the cash flows for each period. I/YR = 11. This should give the following NPVs: NPV(A) = $6,796. 93. NPV(B) = $31,211.52. Computer system B creates the most value for the firm.

• Question 1738:

  What is the measure that indicates how precise a prediction of Y is based on X or, conversely, how inaccurate the prediction might be?

  A. Least squares principle
  B. Slope of the line
  C. None of these answers
  D. Y intercept
  E. Regression equation
  C. None of these answers

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  Explanation

  This refers to the standard error of estimates.

• Question 1739:

  Copybold Corporation is a start-up firm considering two alternative capital structures--one is conservative and the other aggressive. The conservative capital structure calls for a D/A ratio = 0.25, while the aggressive strategy call for D/A =

  0.75. Once the firm selects its target capital structure it envisions two possible scenarios for its operations: Feast or Famine. The Feast scenario has a 60 percent probability of occurring and forecast EBIT in this state is $60,000. The Famine state has a 40 percent chance of occurring and the EBIT is expected to be $20,000. Further, if the firm selects the conservative capital structure its cost of debt will be 10 percent, while with the aggressive capital structure its debtcost will be 12 percent. The firm will have $400,000 in total assets, it will face a 40 percent marginal tax rate, and the book value of equity per share under either scenario is $10.00 per share. What is the difference between the EPS forecasts for Feast and Famine under the conservative capital structure?

  A. $2. 20
  B. $0.80
  C. $0
  D. $0.44
  E. $1.00
  B. $0.80

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  Explanation

  Debt = 25% = $100,000; Equity = 75% = $300,000; Total assets = $400,000. Feast Famine Probability0.60.4 EBIT$60,000$20,000 Less: Interest10,00010,000 EBT$50,000$10,000 Less: Taxes20,0004,000 NI$30,000$6,000 # shares30,00030,000 EPS$1.00$0.20 Difference in EPS for conservative capital structure: EPS(Feast) - EPS(Famine) = $1.00 - $0.20 = $0.80.

• Question 1740:

  What is the value of a preferred stock with company earnings of $30 and a required rate of return of 10%?

  A. $600
  B. $283
  C. $129
  D. $300
  E. Not enough information
  E. Not enough information

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  Explanation

  The value of a preferred stock is the present value of its dividends, which is equal to the annual dividend divided by the required rate of return. Since the annual dividend is not given, one cannot answer this question.