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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1761:

  An investor buys 200 shares of ABC at the market price of $100 on full margin. The initial margin requirement is 40 percent and the maintenance margin requirement is 25 percent. If the shares of stock later sold for $200 per share, what is the rate of return on the margin transaction?

  A. 400%.
  B. 100%.
  C. 200%.
  D. 500%.
  A. 400%.

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  Explanation

  200 shares at a cost of $100/share is $20,000 (i.e., 200x100). With a 40% initial margin requirement, the cost of the investment would be $20,000x0.4=$8,000. When the shares are sold, the portfolio is worth $40,000 ($200x200). Hence, the rate of return would be [(40,000/8,000)-1]x100 = 400%.

• Question 1762:

  The following data have been extracted from the financial statements of a firm for two years, 1985 and 1986: 1985 1986

  Assets 4,376 5,214 Sales 8,312 7,845 Receivables 985 756 Inventory 1,108 1,243 COGS 5,494 4,971

  The inventory turnover ratio and the average inventory processing period for 1986 equal ________.

  A. 4. 23 86. 31 days
  B. 5. 19 70.33 days
  C. 4. 87 74. 95 days
  D. 5. 62 64. 95 days
  A. 4. 23 86. 31 days

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  Explanation

  One of the properties of the inventory that is of interest is the rate at which it turns over i.e. the average processing time it takes for a given inventory item to be sold. This can be estimated using either net sales (as is the case with receivables) or the cost-of-goods-sold. COGS is preferable since it does not include the profit margins involved in net sales. Therefore, two relevant ratios are: a. Inventory turnover ratio = COGS/average inventory. b. Average inventory processing period = 365/inventory turnover. For 1986, the average inventory equals (1243+1108)/2 = 1,176. Inventory turnover ratio = 4,971/1,176 = 4. 23. Average inventory processing period = 365/4. 23 = 86. 31 days.

• Question 1763:

  Which of the following AIMR Standards states that the financial analyst must use reasonable judgment as to the inclusion of relevant factors in research reports?

  A. III (C.2)
  B. III A
  C. III D
  D. IV (A.2)
  D. IV (A.2)

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  Explanation

  Standard IV (A.2) - Research Reports states: "Members shall use reasonable judgment regarding the inclusion or exclusion of relevant factors in research reports."

• Question 1764:

  If the critical value for a test statistic equals 2. 45, what value of the test statistic would guarantee no chance of making a Type I error?

  A. None of these answers
  B. 3. 74
  C. 2. 14
  D. 4. 56
  E. 2. 46
  C. 2. 14

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  Explanation

  The type I error is rejecting the null hypothesis when it is actually true. So if we accept the null hypothesis, there is no possibility of committing the type I error. Therefore, we can only accept the null if our test statistic falls inside the acceptance region between -2. 45 and +2. 45.

• Question 1765:

  Three young children approach a gum ball machine, each with a nickel to spend. The machine has just been filled with 50 black, 150 white, 100 red and 100 yellow balls that have been thoroughly mixed. Sue and Jim approached the machine first. They both said they wanted red gum balls. What is the likelihood they both will get their wish?

  A. None of these answers
  B. 0.062
  C. 0.33
  D. 0.75
  E. 0.50
  B. 0.062

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  Explanation

  100/400*99/399 = 0.062

• Question 1766:

  Given that the expected growth rate for a firm is 5%, the expected total asset turnover is 0.87, the expected financial leverage multiplier is 0.81, the expected return on capital is 1.4, and expected retention rate is 60%, what is the expected net profit margin of the firm?

  A. 11.8%
  B. 12. 3%
  C. 14. 8%
  D. Not enough information
  E. 6. 9%
  F. 9.3%
  A. 11.8%

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  Explanation

  The growth rate of a firm is equal to the expected retention rate multiplied by the expected return on equity. Rearranging this yields that the expected ROE is equal to the growth rate divided by the retention rate (ROE = 0.05/0.60 = 0.0833). The expected ROE is itself equal to the expected profit margin multiplied by the expected asset turnover multiplied by the expected financial leverage multiplier. Rearranging this yields that the expected net profit margin is equal to the ROE divided by the total asset turnover and the financial leverage multiplier (0.0833 / (0.87 x 0.81) = 0.118 = 11.8%

• Question 1767:

  The table below lists information on price per share and shares outstanding for three stocks ?Rocking, Payton, and Strand.

  

  Using the information in the table, calculate the value of a market-value weighted index at year-end and the one-year return on the price-weighted index. The beginning value for the market index is 100. (Note: The choices are listed in the order market-value weighted index value and price-weighted index percent return, respectively). Which of the following choices is closest to the correct answer?

  A. 10.6, 6. 3.
  B. 110.6, -6. 3.
  C. 110.6, 50.0.
  D. 10.6, 8.4.
  B. 110.6, -6. 3.

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  Explanation

  Calculations are as follows:

  

  First, we will calculate the value of the market-value weighted index at year-end, and then we will calculate the return on the price-weighted index.

  Step 1: Calculate value of the market-weighted index at year-end:

  Value of market-weighted index =

  [(market capitalization year-end) / (market capitalization beginning of year)]* Beginning index value

  = (442,500 / 400,000) * 100 = 110.625, or approximately 110.6

  Step 2: Calculate the one-year return on the price-weighted index:

  First, we will calculate the price-weighted index value for both the beginning of year and end of year, then we will calculate the return percentage.

  Value of price-weighted index beginning= (sum of stock per share prices beginning) / (number of stocks beginning)

  = (10 + 50 + 100) / 3 =53. 333

  Value of price-weighted index end= (sum of stock per share prices end) / (number of stocks end)

  = (15 + 50 + 85) / 3 =50.0

  One-Year Return = [(Index value year-end/ Index value beginning of year) -1]* 100

  = [ 50.0 / 53. 333) ?1] * 100 =-6. 3%

  Note:Your calculation may differ slightly due to rounding. Remember that the question asks you to select the closest choice.

• Question 1768:

  Standard III includes which of the following?

  A. Reasonable Basis and Representations
  B. All of these answers
  C. Performance Presentation
  D. Use of Professional Designation
  E. None of these answers
  F. Responsibilities of Supervisors
  F. Responsibilities of Supervisors

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  Explanation

  Standard III deals with Obligation to Inform Employer of Code and Standards, Duty to Employer, Disclosure of Conflicts to Employer, Disclosure of Additional Compensation Arrangements and Responsibilities of Supervisors.

• Question 1769:

  Under a ________ income tax system, as income grows, the average personal income tax liability of individuals and families increases.

  A. corporate
  B. regressive
  C. discretionary
  D. automatic
  E. progressive
  E. progressive

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  Explanation

  With rising incomes, more people find themselves above the "no tax due" cutoff. Others are pushed into a higher tax bracket. Therefore, during an economic expansion, revenue from the personal income tax increases more rapidly than income.

• Question 1770:

  Given a required rate of return of 10%, what is the present value of the coupon payments on a 10-year bond with coupon payments of $100 every six months (for a total of 20 payments)?

  A. $2353. 95
  B. $1054. 48
  C. Not enough information
  D. $1868.27
  E. $1246. 22
  E. $1246. 22

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  Explanation

  The value of the coupon payments can be thought of as the value of an annuity for 20 periods with a rate of return of 5% (half of 10%) for each period. Using appendix C in the book by Reilly and Brown, the present value is equal to $100 x 12. 4622 = $1,246. 22.