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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1851:

  Employers' income tax expense consists of the following obligations except:

  A. Medicare tax
  B. Social Security tax
  C. Federal income tax
  D. State unemployment tax
  C. Federal income tax

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  Explanation

  Federal income tax is withheld from employee paychecks; it is not an expense to the company.

• Question 1852:

  There are 10 rolls of film in a box and 3 are defective. Two rolls are to be selected, one after the other. What is the probability of selecting a defective roll followed by another defective roll?

  A. 1/120, or about 0.0083
  B. 1/15, or about 0.07
  C. None of these answers
  D. 1/4, or 0.25
  E. 1/2, or 0.50
  B. 1/15, or about 0.07

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  Explanation

  The probability of selecting a defective roll in the first selection is 3/10. The probability of choosing another defective roll is 2/9. So 3/10*2/9 = 6/90 = 1/15.

• Question 1853:

  Which of the following statements is most correct?

  A. If a company undertakes a 3-for-1 stock split, then the number of shares outstanding should fall, and the stock price should rise.
  B. All of these answers are correct.
  C. None of these answers are correct.
  D. If a company wants to issue new shares of common stock and also wants to implement a dividend reinvestment plan, then it should implement a new-stock dividend reinvestment plan, rather than an open-market purchase plan.
  E. If a company wants to reduce its debt ratio, then it should repurchase some of its common stock.
  D. If a company wants to issue new shares of common stock and also wants to implement a dividend reinvestment plan, then it should implement a new-stock dividend reinvestment plan, rather than an open-market purchase plan.

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  Explanation

  The new stock type of dividend reinvestment plan invests the dividends in newly issued stock, hence these plans raise new capital for the firm.

• Question 1854:

  According to the AIMR-PPS, composites must be asset weighted using

  A. end-of-period weightings.
  B. middle-of-period weightings.
  C. performance-period weightings.
  D. beginning-of-period weightings.
  D. beginning-of-period weightings.

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  Explanation

  Composites must be asset weighted using beginning-of-period weightings. This is a requirement for calculation of returns.

• Question 1855:

  The coefficient of variation is useful when:

  I. The frequency distribution contains open-ended classes or overlapping classes.

  II. The data sets being compared contain data in different measurement units.

  III.

  The data sets being compared contain data with similar measurement units.

  A. I only
  B. I and II
  C. III only
  D. II only
  E. I and III
  D. II only

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  Explanation

  The coefficient of variation is useful when the means of the data sets are widely different or when the observations are in different measurement units.

• Question 1856:

  Theta Corp.'s stock is expected to appreciate 6% per year. If no dividends are paid out over the next 5 year and the current stock price is $28, what's the expected price in 5 years?

  A. $39.6
  B. $37. 5
  C. $41.2
  D. $34. 9
  B. $37. 5

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  Explanation

  The expected price in 5 years is 28*(1.06^5) = 37. 5

• Question 1857:

  Suppose that stock prices are mean reverting over a three to five year period. Which form of the efficient market hypothesis does this violate?

  A. None.
  B. Weak form only.
  C. Semistrong and weak forms only.
  B. Weak form only.

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  Explanation

• Question 1858:

  A project requires an initial outlay of $600. Over the next 5 years, it expects to have cash outflows of $200, $300, $175, $350 and $150. The revenues over the same period equal $100, $400, $700, $550 and $800. Assume that these cash flows occur at year-end. The project's payback period equals ________.

  A. 2. 91 years
  B. 3. 38 years
  C. 4. 11 years
  D. 3. 82 years
  B. 3. 38 years

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  Explanation

  The payback period is defined as the expected number of years that would be required to recover the original investment. In particular, Payback period = Years before full recovery + (unrecovered cost at the start of payback year)/(net cash flow in the payback year) To calculate the payback period, you must have the stream of net cash flows = Revenues - out flows. The net cash flows over the next 5 years are $(100-200), $(400-300), $(700-175), $(550-350) and $(800-150) i.e. the net cash flows are: -$100, $100, $525, $200 and $650. The complete recovery of the total outlay of $600 + $100 (year 1 net outflow) occurs in the 4th year. At the beginning of the 4th year, the outstanding balance equals 600+100-100525 = $75. Therefore, payback period = 3 + 75/200 = 3. 375 years.

• Question 1859:

  What are the critical values for a two-tailed test of hypothesis test if alpha = .01?

  A. +/- 1.645
  B. +/- 2. 58
  C. +/- 1.96
  D. None of these answers
  E. +/- 2. 33
  B. +/- 2. 58

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  Explanation

  For a level of significance of 0.01, we can find the z value by 1.0 - 0.505 = 0.495 which is 2. 58.

• Question 1860:

  A firm has an expected dividend payout ratio of 60%, and an expected dividend growth rate of 5% per year. What is the firm's Price/Earnings ratio if the appropriate discount rate is 8% per year?

  A. 20
  B. Not able to compute with the above data.
  C. 200
  D. 2
  A. 20

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  Explanation

  Value = 0.60/(0.08-0.05) = 20.