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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 191:

  Which of the following statements about Beta is TRUE?

  A. In the characteristic line, the termEResidualsequals the portion of the asset's returns that are correlated to the market portfolio's returns.
  B. The calculation of Beta assumes that future variability will equal past variability.
  C. Beta ERmarket.
  D. Beta and standard deviation differ as risk measures in that beta measures only systematic risk, whereas standard deviation measures only unsystematic risk.
  B. The calculation of Beta assumes that future variability will equal past variability.

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  Explanation

  Standard deviation measures total risk. When Beta < 1, ERstock< ERmarket. The characteristic line is the equation for Beta. The error term, EResiduals, equals the portion of the asset's returns that areuncorrelatedto the market portfolio's returns, or unsystematic risk. This error term has an expected value of 0 and the standard deviation is called the residual standard error.

• Question 192:

  Firms in which of the following industries would likely have the highest earnings retention rates? Further, would firms within this industry likely be financed primarily through debt or equity?

  A. Automobile manufacturing; debt
  B. Retail banking; debt
  C. Retail banking; equity
  D. Automobile manufacturing; equity
  E. Pharmaceuticals; debt
  F. Pharmaceuticals; equity
  F. Pharmaceuticals; equity

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  Explanation

  Firms in the pharmaceutical industry would likely retain a higher proportion of their earnings than automobile manufacturers or retail banks. This is reasoned primarily by two factors. First, pharmaceutical companies have high research and

  development costs, and their success depends largely on the discovery of promising drugs. This requires that adequate funds be held within the firm. Secondly, growth opportunities in the pharmaceuticals industry are much more abundant

  than in either the automobile manufacturing or retail banking, and this is largely due to the maturity of the industry as a whole.

  Pharmaceutical companies typically have numerous positive NPV investment opportunities.

  In terms of financing, pharmaceutical firms would be expected to have a capital structure weighted more heavily toward equity than debt. As the cash flows of an industry become more certain and stable, the level of debt financing should be

  expected to increase. Automobile manufacturers and retail banks have very predictable cash flows, along with high degrees of leverage. Certainty of revenues and earnings is a very important consideration in the financing decision, and firms

  whose cash flows are both stable and easily forecasted will likely prefer a high degree of debt versus equity financing. Another important note to consider is the fact that the balance sheet of a pharmaceutical firm is more heavily weighted

  toward intangible assets than is a retail bank or an automobile manufacturer. Intangible assets cannot easily be pledged as collateral for a loan, neither can intangible assets be liquidated with any degree of certainty. A high proportion of

  intangible assets within the asset structure of a firm is conducive to a low degree of debt financing.

• Question 193:

  Ranking conflicts occur between the NPV and IRR methods because I NPV profiles have differing slopes. II IRR assumes reinvestment of intermediate cash flows at the IRR rate. III IRR doesn't take into account cash flows occurring far in the future. IV NPV incorrectly uses the same discount rate for all cash flows.

  A. I, II and III only
  B. II only
  C. I only
  D. II, III and IV only
  E. All of these are correct
  F. I and II only
  F. I and II only

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  Explanation

  Project with differing initial investments and cash flow patterns may have NPV profiles with differing slopes. The point at which the NPV profiles cross represents the discount rate at which the NPV of both projects is the same. There will be ranking conflicts between NPV and IRR at discount rates below this point. The NPV method implicitly assumes that the rate at which cash flows can be reinvested is the cost of capital, whereas the IRR method assumes that the firm can reinvest at the IRR. IRR does take all cash flows into account, even those far in the future. It is correct to use the same discount rate for all project cash flows, unless you know project risk will change in the future.

• Question 194:

  Given the following estimated information, compute the estimated earnings per share.

  Net profit margin 3. 2%

  Gross profit margin 28.1%

  Sales $11.44B

  Common shares outstanding 246,141M

  A. $13. 06 per share
  B. none of these answers
  C. cannot compute with the information given
  D. $1.49 per share
  D. $1.49 per share

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  Explanation

  Earnings per share in this example equals sales x the estimated net profit margin/common shares outstanding = (.032 * 11.44)/.246141 = $1.49.

• Question 195:

  Which of the following is the formula for the value of preferred stock?

  A. dividend multiplied by the required rate of return
  B. dividend divided by the required rate of return
  C. required rate of return divided by the dividend
  D. the present value of an infinite stream of dividends
  B. dividend divided by the required rate of return

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  Explanation

  The value of preferred stock is the stated annual dividend divided by the required rate of return on preferred stock.

• Question 196:

  Which of the following affects a firm's business risk?

  A. The degree of operating leverage.
  B. The risk of adjusting sales prices.
  C. The level of uncertainty about future sales.
  D. All of these answers are correct.
  D. All of these answers are correct.

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  Explanation

  Business risk depends on: (1) unit sales variability, (2) sales price variability, (3) input price variability, (4) ability to adjust output prices for changes in input prices and, (5) the extent to which costs are fixed (operating leverage).

• Question 197:

  If the earnings per share on the Dow Jones were to fall, the Dow Jones:

  A. the question is based on a false premise. Dow Jones is an index and does not have an associated "earnings per share."
  B. will increase in value.
  C. will decrease in value.
  D. may increase or decrease in value.
  D. may increase or decrease in value.

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  Explanation

  The index value = earnings multiplier * earnings per share.

  Even if the earnings per share fall, the earnings multiplier can increase if the outlook for future earnings improves. Hence, a decrease in the earnings itself does not automatically imply that the Dow Jones will fall.

• Question 198:

  Capacity utilization rate is

  A. logarithmically related to profit margin.
  B. not related to profit margin.
  C. positively related to profit margin.
  D. inversely related to profit margin.
  C. positively related to profit margin.

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  Explanation

  Finkel and Tuttle found that the capacity utilization rate, unit labor costs, rate of inflation, and foreign competition were the four major variables that affected the aggregate profit margin. If production increases as a proportion of the total capacity (raising the capacity utilization rate), per-unit fixed production costs and fixed financial costs decrease, thereby raising the profit margin.

• Question 199:

  According to SFAS 95, cash and cash equivalents includes

  A. bank accounts, U.S. Treasury Bills and fixed income securities.
  B. risk-free assets with original maturities of 90 days or less.
  C. risk-free assets with original maturities of 30 days or less.
  D. bank accounts, U.S. Treasury Bills and marketable securities.
  E. only bank accounts.
  B. risk-free assets with original maturities of 90 days or less.

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  Explanation

  Bank accounts, U.S. Treasury Bills, and similar assets qualify.

• Question 200:

  When complying with Standard IV (B.3) - Fair Dealing, there are certain points one should be sure to address when establishing compliance procedures. Which of the following points is NOT mentioned in the Standards of Practice Handbook?

  A. Get as many people involved within the firm that a recommendation is going to be disseminated.
  B. Shorten the time frame between decision and dissemination.
  C. Disclose levels of service.
  D. Establish control over trading activity.
  E. Simultaneous dissemination.
  F. Publish personnel guidelines for predissemination.
  G. Establish systematic account review.
  A. Get as many people involved within the firm that a recommendation is going to be disseminated.

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  Explanation

  Members have an obligation to ensure that their firms establish compliance procedures requiring all employees who disseminate investment recommendations or actions to treat clients fairly. The number of people privy to an investment recommendation should be limited. The amount of time that lapses between the decision and the dissemination of the recommendation should be shortened. Guidelines must be established to prohibit persons who have prior knowledge from discussing a pending recommendation. Trading activities should be monitored and controlled. Supervisors should review accounts on a regular basis to ensure that no client is being given preferential treatment.