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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1891:

  "Restricted Periods" are discussed in Standard IV (B.4), Priority of Transactions. Another name for restricted periods is ________ periods.

  A. blackout
  B. restrained
  C. none of these answers
  D. captive
  A. blackout

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  Explanation

  Firm procedures should prevent managers or employees from initiating trades in a security for which their firms have a pending buy or sell order within a 24-hour period. Firms must determine specific requirements relating to such blackout, or restricted periods.

• Question 1892:

  Steve Brown is questioned by his superior about the commonly cited criticisms and benefits of the derivatives market. Which of Brown's statements regarding the criticisms and benefits of derivative markets is most likely correct?

  A. Derivatives markets are often criticized for being too risky and illiquid for all but the most knowledgeable investors.
  B. Derivatives benefit financial markets due to the price discovery and risk management functions they provide.
  C. Derivatives benefit financial markets by generating high fees for dealers wilting to make a market in these securities.
  B. Derivatives benefit financial markets due to the price discovery and risk management functions they provide.

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  Explanation

• Question 1893:

  A firm has an earnings retention rate of 35% and it earns a 12% per year return on its equity. Calculate the expected annual growth rate of the firm's dividend?

  A. 5%
  B. 4. 2%
  C. Not able to compute with the above data.
  D. 6%
  B. 4. 2%

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  Explanation

  g=(RR)(ROE)=0.35*0.12=4. 2%.

• Question 1894:

  Inflation

  A. causes the purchasing power of a dollar to rise.
  B. generally benefits the poor at the expense of the rich.
  C. is measured by changes in the cost of a typical market basket of goods between time periods.
  D. almost always benefits creditors at the expense of debtors.
  C. is measured by changes in the cost of a typical market basket of goods between time periods.

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  Explanation

  Inflation can be measured by using price indexes. In general, these indexes are constructed by calculating the difference between the price of a basket of consumer goods in earlier and later years and dividing by the price of the basket in the first year.

• Question 1895:

  A value investor is considering investing in shares of Microscam International, believing that the market price of Microscam is less than the "intrinsic value" of the shares. In his research, this value investor has gathered the following information about Microscam International:

  Total assets: $200,000,000 Total liabilities: $130,000,000 Number of common shares outstanding: 3,000,000 Current stock price: $22. 15 per share Required return: 18.75% per year Expected growth rate: 17% per year Next dividend: $0.30 per share Earnings per share: $3. 88

  Using this information, what is the book value of Microscam International? Further, are the beliefs of this value investor justified? Assume that the book value calculation accurately illustrates the liquidation value of Microscam.

  A. 5. 709, yes
  B. 0.949, no
  C. 0.949, yes
  D. 5. 709, no
  E. 0.244, yes
  F. None of these answers is correct.
  C. 0.949, yes

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  Explanation

  The book value of a common stock is found by dividing the net worth of a company by the number of outstanding shares. While there exists several different methods for calculating net worth, the most simplistic involves subtracting total

  liabilities from total assets, giving us the shareholder's equity figure.

  Investment professionals often see the book value as a "floor" for common stock prices, and the price-to-book ratio is quite popular in the field of investment management. The calculation of the price-to-book ratio involves the following

  equation:

  Price-to-book ratio = {Market price of common stock at t0 / [(total assets - total liabilities) / # of common shares outstanding]} While the # of common shares outstanding has been provided, the shareholder's equity figure must be calculated

  manually. The calculation of the per share shareholders equity is illustrated as follows:

  Shareholders equity = [($200,000,000 - $130,000,000) / 3,000,000] = $23. 33.

  Now that the shareholders equity has been calculated and transformed into a per-share figure, the priceto-book value can be calculated as follows:

  Price-to-book value = ($22. 15 / $23. 33) = 0.94942.

  As you can see, the required rate of return, along with the expected growth rate, is not necessary in the calculation of the price-to-book ratio.

  Any time the price-to-book ratio is less than one, a stock is said to be "trading at a discount to book."

  Frequently, investment professionals will use the term "intrinsic value" when referring to the book value, and thus stocks trading below their book value are often referred to as being priced "below their intrinsic value." Stocks trading below

  book value are often sought after by value investors, who believe that these shares have been discounted below their real value.

  A figure of more than one for the price-to-book ratio is commonly referred to as "trading at a premium to book."

  While the price-to-book value is a useful tool in the stock selection process, it possesses some important flaws. One problem with the Price-To-Book Ratio is that one of the terms - Book Value - is so easily manipulated. Valuation of inventory

  and real estate are easily adjusted on the books. Stock buy-backs and write-offs of exceptional items also deflate Book Value, making high priced stocks seem overvalued.

• Question 1896:

  Alyeska Salmon Inc., a large salmon canning firm operating out of Valdez, Alaska, has a new automated production line project it is considering. The project has a cost of $275,000 and is expected to provide after-tax annual cash flows of $73,306 for eight years. The firm's management is uncomfortable with the IRR reinvestment assumption and prefers the modified IRR approach. You have calculated a cost of capital for the firm of 12 percent. What is the project's MIRR?

  A. 17. 0%
  B. 15. 0%
  C. 12. 0%
  D. 14. 0%
  E. 16. 0%
  E. 16. 0%

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  Explanation

  TV = $73,306(FVIFA(12%,8)) = $73,306(12. 300) = $901,663. 80.

  $275,000 = $901,663. 80 / (1 + MIRR)^8

  (1 + MIRR)^8 = (FVIF(Irr,8)) = 3. 27869.

  Look in table: Periods = 8, I = 16%. MIRR = 16%.

  Alternate method

  3. 27869^1/8 = 1 + MIRR

  MIRR = 16%.

• Question 1897:

  Assuming that a preferred stock is fairly priced, is worth $23, and has annual dividends of $6, what is its required rate of return?

  A. 19%
  B. Not enough information
  C. 26%
  D. 31%
  E. 14%
  C. 26%

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  Explanation

  The value of a preferred stock is the present value of its dividends, which is equal to the annual dividend divided by the required rate of return. Rearranging this, the required rate of return is equal to the dividend divided by the stock price. In this question, the required rate of return is equal to 6/23 = 0.26 = 26%.

• Question 1898:

  Peter Black is an options trader for High Smith Investments. Black trades options on the U.S. and U.K. stock exchanges. Over the past three weeks, Black has been following the price movements of options on two companies: U.S.-based Pacific Chemicals Inc. (PCI), and U.K.-based Merchant Clothing Co. (MCC). Black has observed that over the past few days, the price of put options on PCI stock have suddenly increased, and the price of call options on MCC stock have suddenly increased. Which of the following provides the most accurate explanation of Black's observations? Interest rates in:

  A. the U.S. have risen and the volatility of MCC stock has risen.
  B. the U.K. have fallen and the volatility of PCI stock has risen.
  C. the U.S. have fallen and the volatility of MCC stock has risen.
  C. the U.S. have fallen and the volatility of MCC stock has risen.

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  Explanation

• Question 1899:

  The current dividend yield on a stock A is 3. 2%. The stock has a required rate of return of 9%. If the firm just paid a dividend of $1.65, what's the expected dividend for next year, assuming a constant growth rate?

  A. $2. 01
  B. $1.89
  C. $1.75
  D. $1.83
  C. $1.75

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  Explanation

  The dividend yield, defined as the expected dividend next period divided by current price, equals D1/Po, in standard notation. Using the Dividend Discount Model, this is equal to k - g. With k = 9%, we get 3. 2% = 9% - g. Therefore, g = 5. 8%. The expected dividend next year is then equal to 1.65 * 1.058 = $1.75.

• Question 1900:

  What is the median of 26, 30, 24, 32, 32, 31, 27 and 29?

  A. 32
  B. 30
  C. None of these answers
  D. 29
  E. 29.5
  E. 29.5

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  Explanation

  Ordering the numbers we have 24,26,27,29,30,31,32,32. Since there is an even number of observations (8), the median is the average of the two middle observations (29 + 30)/2 = 29.5.