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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1991:

  A resistance level

  A. is the price range below the current price at which the technical analyst would expect the stock supply to increase, pushing down its price below that range. A stock nearing that range would be a good candidate for short selling because of the negative price support that it would receive.
  B. is the price range above the current price at which the technical analyst would expect the stock supply to increase, abruptly reversing any price increase. A resistance level tends to develop after the stock has experienced a decline from a higher price level.
  C. is the price range above the current price at which the technical analyst would expect the stock price to get an added boost of demand, pushing its price even higher. If the stock price makes it to the resistance level, future gains are expected.
  D. is the price range below the current price at which the technical analyst would expect the stock to get an added boost of demand, keeping its price from falling below that range. The resistance level is usually near the 12-week low.
  B. is the price range above the current price at which the technical analyst would expect the stock supply to increase, abruptly reversing any price increase. A resistance level tends to develop after the stock has experienced a decline from a higher price level.

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  Explanation

  Technical analysts believe that investors who have acquired a stock at a higher price will look for an opportunity to sell it near their break-even points. A resistance level is the target price range that these investors look for to sell their stock at minimum or no loss. Such a price range tends to develop after the stock has experienced a decline from a higher price level.

• Question 1992:

  Given current earnings of $2 per share, an expected dividend growth rate of 10% and a P/E of 12. 5, what is the value of the stock?

  A. $30.50
  B. $22. 50
  C. None of these answers
  D. $27. 50
  D. $27. 50

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  Explanation

  The next period earnings is $2. 00 x 1.10 or $2. 20. The value of the stock is thus the P/E ratio times the earnings = 12. 5 x $2. 20 or $27. 50

• Question 1993:

  Which of the following is/are true?

  I. For a given level of significance, it becomes harder to reject the null hypothesis as the sample size decreases.

  II. For a given sample size, it becomes harder to reject the null hypothesis as the significance level decreases.

  III.

  It is easier to reject the null hypothesis the lower the R-square.

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

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  Explanation

  As the sample size increases, it becomes easier to test whether the null hypothesis can be rejected at the specified significance level (Intuitively, it is harder for a false hypothesis to hide its falsity when there are a larger number of observations testing its veracity). In fact, the critical t-statistic required to reject the null decreases as the sample size increases for a given level of significance. A higher significance level makes it easier to reject the null hypothesis. This is because you are enforcing a looser standard on rejecting the null (recall that the significance level represents the probability thatyou have rejected the null when, in fact, it is true). In fact, significance level and critical t-statistic are inversely related. R-square is not used in hypothesis testing but in regression analysis, though it does not measure the significance of a regression. A regression with a very low R-square can be highly significant; the low R-square only implies that the behavior of the dependent variable is governed largely by random noise.

• Question 1994:

  In an examination of several capital projects, the management of a large international conglomerate attempts to calculate the Weighted Average Cost of Capital for the firm. The Company is capitalized according to the following schedule

  based on market values: 55% debt

  36% common stock

  9% perpetual preferred stock

  Additionally, assume the following information:

  Yield on outstanding debt: 8.95%

  Tax rate: 35%

  Annual preferred dividend: $0.70

  Preferred stock price: $8.90

  Return on equity: 17. 36%

  Dividend payout ratio: 45%

  Cost of common stock: 15. 10%

  Using this information, what is the WACC for this large multinational conglomerate?

  A. 10.11%
  B. 9.34%
  C. None of these answers.
  D. 9.29%
  E. 9.78%
  F. The answer cannot be completely calculated from the information provided.
  B. 9.34%

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  Explanation

  In order to calculate the WACC, it is necessary to first calculate the component cost of debt, common equity, and preferred equity. Once the cost of these components is determined, they are imputed into the WACC equation, which is as

  follows: {WACC = [(% weight of debt securities * cost of debt) + (% weight of common stock * cost of common stock) + (% weight of preferred stock * cost of preferred stock)]} To calculate the component cost of debt, use the following

  equation:

  {Cost of debt = [yield on outstanding debt securities * (1 - tax rate)}

  Factoring in the given information into this equation would yield the following:

  {After-tax cost of debt = [8.95% * (1 - 0.35%)]} = 5. 818%

  To calculate the component cost of outstanding preferred stock, the following equation must be used:

  {Cost of preferred stock = [annual dividend / preferred stock price]}

  {Cost of preferred stock - = [$0.70 / $8.90]} = 7. 865%.

  The final component of the WACC calculation, the cost of common equity, has been provided as 15. 10%.

  Now that the after-tax costs of debt, preferred stock, and common stock have been determined, the WACC calculation can be found. The calculation of the WACC is as follows:

  {[0.55 * 0.05818] + [0.36 * 0.1510] + [0.09 * 0.07865]} = 9.344%.

• Question 1995:

  Each salesperson in a large department store chain is rated either below average, average, or above average with respect to sales ability. Each salesperson is also rated with respect to his or her potential for advancement either fair, good, or excellent. These traits for the 500 salespeople were cross classified into the following table. Sales Ability Potential for Advancement Fair Good Excellent Below Average 161222 Average 456045 Above Average 9372135

  What is the probability that a salesperson selected at random will have above average sales ability and excellent potential for advancement?

  A. 0.20
  B. 0.50
  C. None of these answers
  D. 0.75
  E. 0.27
  E. 0.27

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  Explanation

  We need the prob(above average) = (93 + 72 + 135)/500 and prob(excellent given above average) = 135/300. Therefore 300/500*135/300 = 0.27

• Question 1996:

  Given that the beginning value on a stock is $530, expected earnings are $50, the dividend payout ratio is 40%, and the required rate of return is 14%, what is the minimum expected ending value of the stock that makes it a profitable investment?

  A. $611.20
  B. $584. 20
  C. $591.20
  D. $604. 20
  E. Not enough information
  B. $584. 20

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  Explanation

  Expected dividends equal 50 x 0.4 = $20. In order for a stock to be a good investment, its rate of return should be equal to or greater than the required rate of return. The minimum ending value that would make the stock investment in this question profitable is given by the equation (P2 + D) / P1 = 1 + k, where P2 is the ending value, P1 is the beginning value, D is the expected dividend, and k is the required rate return. Rearranging this yield P2 = ((k + 1) x P1) - D. In this question, the minimum ending value is (1.14 x 530) - 20 = $584. 20.

• Question 1997:

  Beginning inventory of 50 units, purchased at $5 50 units purchased at $10 35 units purchased at $9 25 units sold at $15 70 units sold at $12 Tax rate = 40% Beginning LIFO reserve = $300

  Given the above, the LIFO reserve at the end of the period is ________.

  A. $225
  B. $185
  C. $135
  D. $165
  D. $165

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  Explanation

  COGS = Beginning inventory - Ending inventory + Purchases.

  FIFO COGS = 50*5 + 45*10 = $700. LIFO COGS = 35*9 + 50*10 + 10*5 = $865. Beginning inventory = 50*5 = $250. Purchases = 50*10 + 35*9 = $815.

  Therefore, FIFO ending inventory = 250 + 815 - 700 = 365 and LIFO ending inventory = 250 + 815 - 865 = 200.

  The LIFO Reserve is defined as the difference between the values of the inventory under FIFO and under LIFO. Therefore, LIFO reserve = 365 - 200 = 165.

• Question 1998:

  Where does the coefficient of variation (CV) generally lie between?

  A. -1 and +1
  B. -3 and +3
  C. None of these answers
  D. 0% and infinity
  E. Unlimited values
  D. 0% and infinity

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  Explanation

  CV always lies between 0% and infinity. The larger the CV, the larger the dispersion.

• Question 1999:

  The following data have been obtained from a firm's financial statements:

  operating profit margin 34% interest expenses 465 depreciation expenses 123 debt-to-equity ratio 0.60 total assets 2,375 total sales 4,109 tax rate 37%

  The firm's ROE equals ________.

  A. 19.17%
  B. 22. 88%
  C. 56. 32%
  D. 34. 44%
  D. 34. 44%

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  Explanation

  The answer to this requires you to know the extended duPont system. However, you should NOT rely on your memory for complex formulas. Rather, start from the primary quantity needed (ROE here) and use some basic definitions and common sense. This approach will ensure that you are not caught by surprise during the exam. You need to calculate net income and total equity to obtain ROE, since ROE = net income/total equity. Operating profits equal earnings before depreciation, interest and taxes (EBDIT). The operating profit margin expresses EBDIT as a fraction of total sales and indicates the level of profitability of the firm. In this case, EBDIT = 4109*34% = 1,397. Since interest expenses are taxdeductible, EBT = 1,397 - interest expense - depreciation = 1,397 - 465 - 123 = 809. Therefore, net income after taxes = 809*(1 - 37%) = 510. Also, debt + equity = total assets and debt = 0.6*equity (given). So total assets = 2,375 = 1.6*equity, giving equity = 2,375/1.6 = 1,484. Finally, ROE = 510/1484 = 34. 34%.

• Question 2000:

  Jay Crewson, equity analyst at a large investment bank, formerly worked with a group of contrary-opinion technician traders who traded exclusively using contrary indicators. He was recently transferred to support a group of smart-money technicians. Since he is still adjusting to the "new" rules, he asks Richard Ruscoe, another analyst in the group, to review his work. Ruscoe reviews Crewson's latest recommendation list and points out that one of the statements is incorrect. Which of the following is the INCORRECT statement? Buy:

  A. debit balances in brokerage accounts increased.
  B. the ratio of short sales by specialists to total NYSE short sales fell below 0.30.
  C. investor credit balances in brokerage accounts increased.
  D. the yield-differential between high quality and lower-quality bonds decreased to 90 basis points.
  C. investor credit balances in brokerage accounts increased.

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  Explanation

  Increased investor credit balances in brokerage accounts (indicating a bearish trend) are a bullish sign to contrary-opinion technicians. The other statements are true and are indicators used by smart-money technicians. When the yield-differential between high quality and lower-quality bonds narrows (or decreases), it indicates that the confidence index has increased and smart-money technicians are bullish.