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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1931:

  All else equal, which of the following is/are true?

  I. Firms with higher business risk tend to have lower debt ratios.

  II. The higher the tax rate imposed on a firm, the lower its optimal debt ratio.

  III.

  The lower a firm's future capital requirements, the lower its current debt ratio.

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

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  Explanation

  The higher the business risk and the future capital requirement, the stronger the balance sheet must be. This is accomplished through a lower reliance on debt. The higher the tax rate, the higher is the attractiveness of the tax-deductibility of the interest payments on debt. This lowers the after-tax cost of debt, raising the optimal debt ratio.

• Question 1932:

  Which of the following is true in a normal distribution?

  A. None of the answers
  B. All of these answers are correct
  C. Mean divides the distribution into two equal parts
  D. Mean equals the mode and the median
  E. Mode equals the median
  B. All of these answers are correct

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  Explanation

  All the above holds for a normal distribution.

• Question 1933:

  Three equity analysts at Schiler and Company are debating their supervisor's claim that significant excess return can be generated by exploiting inefficiencies in the capital markets. Analyst A states, "... the large number of profit maximizing investors researching investment opportunities creates an efficient market." Analyst B rebuts by stating, "Over the past three years, my technical analysis strategy has outperformed all the major benchmarks, which proves the markets are not efficient." Analyst C states, "High transactions costs improve the information efficiency of capital markets." The statement that is most likely to be correct was made by:

  A. Analyst A.
  B. Analyst B
  C. Analyst C
  A. Analyst A.

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  Explanation

• Question 1934:

  The section of a firm's annual report entitled "Management's Discussion and Analysis" (MDandA)

  A. is a technical analysis of past results and a defense of those results of management.
  B. includes the company president's letter.
  C. covers three financial aspects of a firm's business: liquidity, capital resources, and results of operations.
  D. covers marketing and product line issues.
  E. none of these answers.
  C. covers three financial aspects of a firm's business: liquidity, capital resources, and results of operations.

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  Explanation

  The MDandA is included in SEC filings. It addresses in a nonquantified manner the prospects of a company. The SEC examines it with care to determine that management has disclosed material information affecting the company's future results.

• Question 1935:

  Firms with records or performance calculations for periods prior to the applicable effective date(s) that are not in conformance with the AIMR Performance Presentation Standards can still claim compliance with the standards if certain conditions are met. Which of the following is an option available to such a firm?

  A. None of these answers are options available to such a firm.
  B. All of these answers are options available to such a firm.
  C. The firm can restate its historical performance in accordance with the Relaxed Retroactive Standards for retroactive compliance.
  D. The firm can use its nonconforming historical performance and disclose specifically when and how the performance is not in compliance.
  E. The firm can restate its historical performance numbers in accordance with the Standards.
  B. All of these answers are options available to such a firm.

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  Explanation

  Firms with records or performance calculations for periods prior to the applicable effective date(s) that are not in conformance with the Standards can choose any of the options listed.

• Question 1936:

  Which of the following is/are true about Goodwill?

  I. It represents the amount paid for an acquired firm that cannot be identified with tangible assets.

  II. US GAAP prohibits capitalization of Goodwill.

  III.

  IRS does not allow amortization of Goodwill for tax purposes.

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

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  Explanation

  Under US GAAP, Goodwill generated during acquisitions are capitalized; it does not allow capitalization of internally generated Goodwill.

• Question 1937:

  The unemployment rate equals the number of persons

  A. unemployed divided by the population age 16 and over.
  B. unemployed divided by the number in the labor force.
  C. not working divided by the population age 16 and over.
  D. unemployed divided by the number employed.
  B. unemployed divided by the number in the labor force.

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  Explanation

  The rate of unemployment is the percent of persons in the labor force who are unemployed. It is calculated as: number of persons unemployed divided by the number of persons in the labor force.

• Question 1938:

  Bill Foley, CFA, manages an intermediate tax-exempt bond fund. Foley makes the following two comments about securities in his portfolio.

  Statement 1:Revenue bonds usually pay a higher coupon rate than general obligation bonds.

  Statement 2:Double barreled bonds are municipal securities that are exempt from both federal and state taxes.

  Which of the following best evaluates Statement 1 and Statement 2?

  A. Only Statement 1 is correct.
  B. Only Statement 2 is correct.
  C. Both Statements are incorrect.
  A. Only Statement 1 is correct.

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  Explanation

• Question 1939:

  Which of the following is/are TRUE under GAAP?

  I. The change in the assets of a firm net of the change in liabilities represents a change in the total equity of the firm.

  II. If the assets of the firm increase by $100 and liabilities remain unchanged, the common stock equity increases by $100.

  III. A firm can increase its assets by borrowing money and keeping it as cash reserve.

  IV.

  A firm can increase its equity by borrowing money and keeping it as cash reserve.

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

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  Explanation

  Use the basic equation, Assets = Liabilities + Total Equity.

  II is false since you need "Total equity" comprises of common stock as well as other forms of equity like preferred issues. IV is false since the borrowing increases only the liabilities while the cash increases only the assets, leaving equity

  unchanged.

• Question 1940:

  International trade can benefit domestic firms because:

  A. the market contracts and allows economies of scale in production.
  B. consumers purchase more from local firms.
  C. none of these answers.
  D. competition is promoted in domestic markets and consumers can purchase a wide diversity of goods at economic prices.
  E. opportunity costs for all goods increase.
  D. competition is promoted in domestic markets and consumers can purchase a wide diversity of goods at economic prices.

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  Explanation

  Competition from abroad helps keep domestic producers on their toes. Domestic producers that otherwise might have few rivals will have to constantly be seeking ways to improve quality and keep costs low. Simultaneously, the diversity of goods that is available from abroad provides consumers with a broader array of choices than would be available in the absence of international trade.