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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1841:

  Consider the following argument: "By selling predetermined amounts of stock in an environment of no taxes or transaction costs, investors can create their own dividend policy. For example, a shareholder that wants a 5% dividend can "create" it by selling 5% of her stock. Conversely, if a company pays a higher dividend than an investor desires, the investor can use the unwanted portion of this dividend to purchase additional stock." This argument applies to which of the following theories? Choose the best answer.

  A. Dividend Relevance Theory
  B. Tax Preference Theory
  C. Trade-off Theory
  D. Bird-in-hand Theory
  E. Dividend Irrelevance Theory
  E. Dividend Irrelevance Theory

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  Explanation

  Modigliani and Miller established the Dividend Irrelevance Theory, which stated that in an environment of no taxes or transaction costs, dividend policy is irrelevant. Modigilani and Miller grounded this assumption in the fact that in such an environment, investors could create their own dividend policy by selling and buying shares of stock.

• Question 1842:

  The classification guidelines of SFAS 95 have not created problems for analysts of the cash flow statement in the following area

  A. differences due to some accounting methods.
  B. noncash transactions.
  C. long-term borrowings.
  D. interest and dividends received.
  E. interest paid.
  C. long-term borrowings.

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  Explanation

  The classification guidelines of SFAS 95 have created problems for analysts of the cash flow statement in cash flows involving property, plant, and equipment, interest and dividends received, interest paid, noncash transactions, and differences due to some accounting methods.

• Question 1843:

  This relates to stock prices moving in trends, analogous to the movement of water.

  A. Mutual Fund Cash Positions
  B. Dow Theory
  C. Short Sales' by Specialists
  D. Diffusion Index
  E. Relative Trend
  F. Margin Debt
  G. Block Uptick-Downtick Ratio
  H. Odd-Lot, Short-Sales Theory
  B. Dow Theory

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  Explanation

  Charles Dow, who published the Wall Street Journal in the late 1800s, described stock prices as moving in trends analogous to the movement of water. He postulated three types of price movements over time:

  1. major trends that resemble tides in the ocean.

  2. intermediate trends that resemble waves.

  3. short-run movements that resemble ripples.

• Question 1844:

  What annual interest rate, compounded annually, will cause a deposit of $550 to become $1,475 in 15 years?

  A. 0.55%
  B. 5. 50%
  C. 8.60%
  D. 17. 88%
  E. 6. 80%
  E. 6. 80%

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  Explanation

  On the BAII Plus, press 15 N, 550 PV, 1475 +/- FV, 0 PMT, CPT I/Y. On the HP12C, press 15 n, 550 PV, 1475 CHS FV, 0 PMT, i.

• Question 1845:

  A firm initially has no debt in its capital structure. As it starts increasing its debt, the stock price begins to rise because of ________. After a threshold, an increase in debt reduces the stock price due to ________.

  A. none of these answers
  B. higher leverage; higher probability of default
  C. tax deductions; expected default and bankruptcy costs
  D. lower cost of retained earnings; higher cost of debt
  C. tax deductions; expected default and bankruptcy costs

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  Explanation

  Debt offers tax shelter for income that equity does not since interest paid on debt is tax deductible. Therefore, as the firm starts adding debt to its capital structure in lieu of equity, the stock price starts rising. However, at a threshold debt-toequity level, the higher probability of default offsets the value of the debt shield. Beyond this, addition of more debt reduces the stock price.

• Question 1846:

  If you make an initial deposit $500 now into an account, an additional deposit of $800 in 2 years, and a final deposit of $300 in 4 years, how much is in your account in 5 years? Assume the account earns interest at 8% per year, compounded annually.

  A. $2,120.04
  B. $2,408.29
  C. $2,066. 43
  D. $1,905. 51
  E. $2,331.88
  C. $2,066. 43

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  Explanation

  Solve this question by working several compound interest problems, moving each dollar amount over to year 5. On the BAII Plus, press 5 N, 8 I/Y, 500 PV, 0 PMT, CPT FV, which yields $734. 66. Then press STO 1, 3 N, 800 PV, CPT FV, which yields $1,007. 77. Then press + RCL 1 = STO 1. Then press 1 N, 300 PV, CPT FV, which yields $324. 00. Then press + RCL 1 = to see the answer. On the HP12C, press 5 n, 8 i, 500 PV, 0 PMT, FV. Then press STO 1, 3 n, 800 PV, FV. Then press RCL 1 + STO 1. Then press 1 n, 300 PV, FV. Then press RCL 1 + to see the answer. Note that the answer will be displayed as a negative number. Also note that the value of "N" for each dollar amount is based on the distance from year 5. Make sure the BAII Plus has the P/Y value set to 1.

• Question 1847:

  A new extended life light bulb has an average service life of 750 hours, with a standard deviation of 50 hours. If the service life of these light bulbs approximates a normal distribution, about what percent of the distribution will be between 600 hours and 900 hours?

  A. 95%
  B. 68%
  C. None of these answers
  D. 34%
  E. 99.7%
  E. 99.7%

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  Explanation

  z = (X-u)/sigma. z1 = (600 - 750)/50 = -3. 0. z2 = (900 - 750)/50 = 3. 0. from the z tables, z = 3 is 0.4987. Therefore the area between z1 and z2 is 0.4987*2 = 0.9974

• Question 1848:

  A reserve requirement of 12. 5 percent implies a potential money deposit expansion multiplier of ________.

  A. 8
  B. 12. 5
  C. 25
  D. 5
  A. 8

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  Explanation

  The potential money deposit expansion multiplier is calculated by taking the inverse of the reserve requirement ratio. This is: 1/.125 = 8.

• Question 1849:

  Bill Smythe and Katherine Banning want to invest 100% of their available funds in the optimal risky portfolio. Smythe invests his money in a portfolio with an expected return of 14% and a standard deviation of 10%. Banning invests her funds in a portfolio with an expected return of 19% and a standard deviation of 12%. Which of the two investors has invested his/her funds in the optimal portfolio?

  A. Smythe, since his portfolio has minimized total risk.
  B. Banning, since the expected return per unit of risk is higher for her investment.
  C. Both, since the optimal portfolio depends on an investor's individual utility function.
  C. Both, since the optimal portfolio depends on an investor's individual utility function.

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  Explanation

• Question 1850:

  When merchandise inventory is purchased under a periodic system, which account is debited?

  A. Accounts Payable
  B. Cash
  C. Merchandise Inventory
  D. Purchases
  D. Purchases

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  Explanation

  The periodic inventory system records purchases of merchandise inventory in an income statement account called Purchases.