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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1771:

  Of the commonly-employed methods for evaluating capital projects, which of the following offers the most useful, reliable, and germane results for the financial analyst?

  A. Internal Rate of Return
  B. Discounted Payback Period
  C. Net Present Value
  D. Payback Period
  C. Net Present Value

  ---

  Explanation

  In analyzing capital projects, particular weight should be given to Net Present Value (NPV) calculations, as this method is viewed as the most reliable and realistic of the four major capital budgeting analysis methods. Net Present Value calculations are superior to Internal Rate of Return calculations in that NPV works regardless of the size or timing of cash flows, and has a more flexible incorporation of the appropriate discount rate. Payback period should be viewed as the most inferior of the four methods, asit does not incorporate the "time-value of money" principle into its calculation. The Discounted Payback Period is only a slightly improved version of the basic Payback Period.

• Question 1772:

  A random variable can take on four values: 12, 36, 78, 111, each with probability 0.25. The standard deviation of the random variable equals ________.

  A. 152. 4
  B. 49.3
  C. 1,451
  D. 38.1
  D. 38.1

  ---

  Explanation

  Since all the observations occur with equal probability, the mean of the observations is (12 + 36 + 78 + 111)*0.25 = 59.25. The variance is then given by 0.25*( [12-59.25]^2 + [36-59.25]^2 + [78-59.25]^2 + [111-59.25]^2) = 1451. The standard deviation is equal to sqrt(1451) = 38.1.

• Question 1773:

  Which of the following are formulas for sample variance?

  I. [1/(n-1)] * sum (as i goes from 1 to n) of (X_i - Xbar)^2.

  II. [1/n] * sum (as i goes from 1 to n) of (X_i - Xbar)^2.

  III.

  [1/(n-1)] * {sum (as i goes from 1 to n) of (X_i)^2 - (1/n) * [sum (as i goes from 1 to n) of (X_i)]^2}.

  A. I only.
  B. None of these answers is correct.
  C. III only.
  D. II only.
  B. None of these answers is correct.

  ---

  Explanation

  I and III are equivalent and correct; III is the computational formula for sample variance.

• Question 1774:

  Which of the following statements is false in reference to confidence intervals and/or tests of significance? Choose the best answer.

  A. The three conventional level of confidence are 0.10, 0.05, and 0.01. B. All else equal, the confidence interval for a 1% significance level is larger than the confidence interval for a 5% significance level.
  C. The confidence level is typically equal to (1 - the probability of a Type II error).
  D. The significance level is denoted by the Greek letter alpha.
  E. The confidence level is equal to the significance level.
  F. More than one of these answers is incorrect.
  F. More than one of these answers is incorrect.

  ---

  Explanation

  More than one of these answers is correct. First, the confidence level is not equal to the significance level. Rather the confidence level is equal to (1 - the significance level). Remember that the significance level of a test is used to quantify the probability of a Type I error, which is defined as the act of incorrectly rejecting the null hypothesis. For example, a confidence level of 95% implies a 5% probability of incorrectly rejecting the null hypothesis (i.e. a Type I error). For example, a hypothesis test associated with a 0.01 significance level indicates a 0.99 level of confidence. The second incorrect statement in this example is that the confidence level of a hypothesis test is found by (1 - alpha), where "alpha" is equal to the probability of a Type I error. Subtracting the probability of a Type II error from one will yield the power of the test. The remaining answers are all correct.

• Question 1775:

  The number of work stoppages in a highly industrialized region for selected months are: 6, 0, 10, 14, 8 and 0. What is the median number of stoppages?

  A. 7
  B. 8
  D. 6
  E. None of these answers
  A. 7

  ---

  Explanation

  Order the observations: 0,0,6,8,10,14. The median is (6 + 8)/2 = 7

• Question 1776:

  Which of the following is/are true?

  I. Straight preferred equity holders to do not have a right to demand redemption.

  II. Dividend payments on preferred equity are cumulative.

  III. Dividends on common stock cannot be paid unless preferred dividends are paid.

  IV.

  Preferred dividends which are in arrears are a non-recorded liability.

  A. I and IV
  B. I, II, III and IV
  C. I, II and III
  D. II, III and IV
  B. I, II, III and IV

  ---

  Explanation

  Preferred equity is usually not redeemable, implying that preferred equity holders do not have a right to demand from the company a retirement of their equity through redemption payment. Preferred dividends that are not paid when due remain a liability, though they are not recorded as such. This leads to an understatement of liabilities since someday, these dividends must definitely be paid. In particular, the dividends in arrears are cumulative and must be paid in full before any ordinary dividends can be paid to common stockholders.

• Question 1777:

  Consider a bond that pays an annual coupon of 5 percent and that has three years remaining until maturity. Assume the term structure of interest rates is flat at 6 percent. How much does the bond price change over the next twelve-month interval if the term structure of interest rates does not change?

  A. 0.84.
  B. -0.84.
  C. -0.56.
  D. 0.00.
  A. 0.84.

  ---

  Explanation

  The bond price change is computed as follows: Bond Price Change = New Price ?Old Price = (5/1.06 + 105/1.062) - 5/1.06 + 5/1.062 + 105/1.063 = 0.84.

• Question 1778:

  An economy is currently in equilibrium at full employment. If there is an anticipated decrease in demand, which of the following effects can be seen in the short run?

  I. Real GDP decreases.

  II. The supply curve shifts to the right.

  III. The demand curve moves to the left.

  IV.

  Prices decrease.

  A. IV only
  B. I, II, III and IV
  C. III and IV
  D. II, III and IV
  D. II, III and IV

  ---

  Explanation

  If the buyers and sellers in the resource market completely anticipate the effects of a decrease in demand, then they will correctly forecast the lower future inflation. This will prompt buyers to postpone current consumption and wait till prices drop. On the other hand, suppliers would prefer to sell today,while prices are high, instead of waiting till the prices fall. The demand curve will therefore quickly move to the left and the supply curve will move to the right. An equilibrium will be reached at a lower price which leaves the real quantities unaffected, changing only the nominal variables.

• Question 1779:

  Howell Enterprises is forecasting EPS of $4. 00 per share for next year. The firm has 10,000 shares outstanding, it pays 12 percent interest on its debt, and it faces a 40 percent marginal tax rate. Its estimated fixed costs are $80,000 while its variable costs are estimated at 40 percent of revenue. The firm's target capital structure is 40 percent equity and 60 percent debt and it has total assets of $400,000. On what level of sales is Howell basing its EPS forecast?

  A. $105,280
  B. $292,444
  C. $1,000,000
  D. $480,400
  E. $316,722
  B. $292,444

  ---

  Explanation

  EPS = (Sales - Fixed costs- Variable costs - Interest)(1 - T)/Shares outstanding.

  Step 1 Calculate interest expense

  Debt = 0.60 x $400,000 = $240,000.

  Interest = 0.12 x $240,000 = $28,800.

  Step 2 Solve for Sales (S)

  EPS = $4. 00 = (S - 0.40S - $80,000 - $28,800) x (1 - 0.40)/10,000

  = (0.60S - $108,800)(0.6)/10,000

  $4. 00 = (0.36S - $65,280)/10,000

  $105,280 = 0.36S

  Sales = $292,444. 44.

  Alternative method

  EPS = (EBIT - Interest)(1 - T)/Shares outstanding.

  Solve for EBIT

  Net Income = EPS x Shares outstanding = $4. 00 x 10,000 = $40,000.

  EBT = NI/(1 - T) = $40,000/(0.6) = $66,667.

  Interest (from above) = $28,800.

  EBIT = EBT + Interest = $66,667 + $28,800 = $95,467.

  S = 0.40S + $95,467 + $80,000

  0.6S = $175,467

  S = $175,467/0.6 = $292,445.

• Question 1780:

  Which of the following variables have a positive relationship with the P/E ratio?

  A. Dividend payout ratio
  B. Both the growth rate of dividends and the dividend payout ratio
  C. Growth rate of dividends
  D. Required rate of return
  B. Both the growth rate of dividends and the dividend payout ratio

  ---

  Explanation

  If larger dividends are paid out, one is willing to pay a higher price for the stock. However, if a high rate of return is required, one should be paying less for the dividend streams in general.