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

• Question 1731:

  Douglas Morin is discussing market efficiency with some college students who are visiting his firm. Morin states that market efficiency would increase if the cost of trading decreases, if the cost of information decreases, and if arbitrageurs had less capital. Morin is least likely to be correct in his opinion about:

  A. the cost of trading

  B. the cost of information

  C. arbitrageurs

  Correct Answer: C

• Question 1732:

  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.

  Correct Answer: C

• Question 1733:

  Berger Corporation has a profit margin of 10.0%, total asset turnover of 0.75, financial leverage of 1.6, and debt/equity ratio of 62.5%. Profit margin is defined as Net income/Sales, total asset turnover is Sales/ Total assets, financial leverage is Total assets/Equity, and debt/equity ratio is Total debt/Equity. Berger\s payout ratio is 60.0%. If these ratios are sustainable for the long term, the best estimate of Berger's growth rate of earnings and dividends is:

  A. 4.8%.

  B. 7.2%.

  C. 7.5%.

  Correct Answer: A

• Question 1734:

  Mark King, CFA, is valuing Nacho Inc., a food distributor. Nacho is currently selling for $28 per share and has a 3.0% dividend yield. The risk-free rate is 4%, and the expected return on the market is 8%. King has calculated Nacho's beta to be 1.25. Based on King's analysis, Nacho stock's intrinsic value is $30 per share. King should:

  A. invest in Nacho shares.

  B. not invest in Nacho shares because the required rate of return is less than the expected rate of return.

  C. not invest in Nacho shares because the required rate of return is greater than the expected rate of return.

  Correct Answer: A

• Question 1735:

  An analyst with Guffman Investments has developed a stock selection model based on earnings announcements made by high P/E stocks. The model predicts that investing in companies with P/E ratios twice that of their industry average that make positive earnings announcements will generate significant excess return. If the analyst has consistently made superior risk-adjusted returns using this strategy, which form of the efficient market hypothesis has been violated?

  A. Weak form of market efficiency.

  B. Semistrong and weak forms of market efficiency.

  C. Strong, semistrong, and weak forms of market efficiency.

  Correct Answer: B

• Question 1736:

  In a rebuttal to comments made by Dilbertico's fundamental analyst, Keith Howard states that future changes in stock prices cannot be predicted based on a company's institutional ownership. State which form of the efficient market hypothesis (EMH) Howard's statement supports and also state a type of empirical study which tests that form of the EMH.

  A. Weak form of the EMH and trading rulestest.

  B. Semistrong form of the EMH and trading rules test.

  C. Semistrong form of the EMH and event study.

  Correct Answer: C

• Question 1737:

  Bart Wiggum believes the current level of the SandP 500 index reflects all public information. To convince his supervisor of his hypothesis, Wiggum has downloaded a daily price series for the SandP 500 index for the period 1950 to 2007. Which of the following tests can be used to test Wiggum's belief about public information?

  A. Runs test.

  B. Autocorrelation test.

  C. Earnings surprise test.

  Correct Answer: C

• Question 1738:

  The constant-growth dividend discount valuation model states that the fair price of a share of common equity is determined by dividing next period's forecasted dividend by the difference between the cost of equity capital and the firm's long- term sustainable growth rate. Using this relationship, the cost of equity capital can alternatively be stated as:

  A. D/V + g.

  B. RFR-(+ RFR).

  C. expected growth rate of dividends minus required rate of return.

  Correct Answer: A

• Question 1739:

  An investor takes a long position in a corn futures contract. Initial margin on the contract is 10% of the contract value and maintenance margin is half of the initial margin. If, at the beginning of the second trading day for the contract, the investor receives a margin call, it is least likely that:

  A. variation margin is greater than maintenance margin.

  B. the final trade from the previous day is greater than the contract price.

  C. the average of the last few trades from the previous day is less than the contract price.

  Correct Answer: B

• Question 1740:

  Anne Quincy took the short side of a forward contract on the SandP 500 Index three months ago in an attempt to hedge short-term changes in her index portfolio. The contract had a term of six months at the purchase date, a contract price of $ 1,221 and Mason Inc. as the counterparty. Quincy is now considering unwinding her short position using either a three-month Mason Inc. contract with a price of $1,220, a three-month JonesCo contract with a price of S1,219, or a three-month Redding Company contract with a price of $1,218. If Quincy wants to minimize credit risk, which of the following should she do? Take the long position in the contract with:

  A. JonesCo.

  B. Mason Inc.

  C. Redding Company.

  Correct Answer: B