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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2021:

  A stock has a beta of 1.44 and the market risk premium is 7. 4%. Its dividend growth rate is 5% and its P/E ratio is 4. 2. If the firm has a dividend payout ratio of 45%, the risk-free rate equals ________.

  A. 5. 06%
  B. 4. 64%
  C. 5. 33%
  D. 4. 89%
  A. 5. 06%

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  Explanation

  If the expected return on the stock is K, then the Dividend Discount Model gives

  P/E = (dividend payout ratio)/(K - g). Therefore, K = g + (div. payout ratio)/(P/E) = 0.05 + 0.45/4. 2 = 15. 71%. Now, CAPM implies that the expected return on a stock equals the risk-free rate plus beta times the market premium. Hence, 15. 71%

  = Rf + 1.44 * 7. 4%, giving Rf = 5. 06%.

• Question 2022:

  Samson Corp. needs to raise $100 million. Delilah Jones, CFA, the Treasurer of Samson, is considering two alternative sources of financing:

  Alternative 1:Selling a large portion of the company's accounts receivable to a separate entity established solely for this purpose. This entity would then seek to obtain a higher credit rating than Samson's own BB rating, to reduce the required

  coupon rate on the bond issue.

  Alternative 2:Issuing bonds, but simultaneously entering into an equity swap so that coupon payments can be covered by appreciation in the underlying equity index. Jones believes the equity index returns will be high for several years.

  Identify the common names for these alternatives.

  A. Both alternatives are structured notes.
  B. Alternative I is a structured note, and alternative 2 is a special purpose vehicle.
  C. Alternative 1 is a special purpose vehicle, and alternative 2 is a structured note.
  C. Alternative 1 is a special purpose vehicle, and alternative 2 is a structured note.

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  Explanation

• Question 2023:

  If a firm's profit margin increases by 8%, the debt-to-equity ratio increases from 35% to 55% and its asset turnover falls by 20%, the effect on its ROE is ________.

  A. +1.3%
  B. +0.24%
  C. -0.8%
  D. +1.6%
  C. -0.8%

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  Explanation

  ROE = net income/equity = (net income/sales)*(sales/assets)*(assets/equity) = (profit margin)*(asset turnover)*(1+debt/equity) The original assets/equity = 1 + 0.35 = 1.35 and the changed assets/equity = 1.55. Therefore, the change in ROE equals (1+8%)*(1-20%)*1.55/1.35 = 0.992. Thus, ROE falls by 0.8%.

• Question 2024:

  Unearned Revenue is classified as

  A. a liability
  B. a contra account
  C. an operating expense
  D. revenue
  A. a liability

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  Explanation

  Unearned revenue represents "services or product owed" and is reported as a liability on the balance sheet.

• Question 2025:

  Technical analysts using contrary-opinion rules would consider

  A. a low cash position by mutual funds to be indicative of an upcoming market peak. When mutual funds invest a relatively low proportion of their portfolios into cash, this is usually indicative of bullish sentiment among the mutual fund managers. Technical analysts believe that the managers are wrong, and that there will be a market peak.
  B. a low cash position by mutual funds to be indicative of an upcoming market peak. When mutual funds invest a relatively low proportion of their portfolios into cash, this is usually indicative of a bearish sentiment among the mutual fund managers.
  C. a high cash position by mutual funds to be indicative of an upcoming market peak. When mutual funds invest a relatively high portion of their portfolios into cash, this is usually indicative of a bearish sentiment among the mutual fund managers.
  D. a high cash position by mutual funds to be indicative of a continuing bear market. When mutual funds invest a relatively high portion of their portfolios into cash, this is usually indicative of a bullish sentiment among the mutual fund managers. Technical analysts believe that the managers are wrong, and that there will be a continuing bear market.
  A. a low cash position by mutual funds to be indicative of an upcoming market peak. When mutual funds invest a relatively low proportion of their portfolios into cash, this is usually indicative of bullish sentiment among the mutual fund managers. Technical analysts believe that the managers are wrong, and that there will be a market peak.

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  Explanation

  Contrary-opinion rules hold that the majority of investors (including mutual fund managers) are wrong as the market approached peaks or troughs. When mutual funds have a low cash position (7%, for example), technical analysts would take this as a sign that mutual fund managers are too bullish about the market, and that it will instead soon reach a peak, and fall after that.

• Question 2026:

  If you deposit $500 today into an account paying 8% per year, compounded quarterly, how much will be in the account after 60 months?

  A. $717. 54
  B. $702. 48
  C. $751.59
  D. $724. 46
  E. $742. 97
  E. $742. 97

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  Explanation

  There are 20 quarters in 60 months (60 divide 3 =). On the BAII Plus, press 20 N, 8 divide 4 = I/Y, 500 PV, 0 PMT, CPT FV. On the HP12C, press 20 n, 8 ENTER 4 divide i, 500 PV, 0 PMT, FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 2027:

  If the ratio of specialists' short sales to total short sales is 25%, then technicians would view this as

  A. neither particularly bullish nor bearish.
  B. a bearish sign.
  C. a sign of an approaching flat market trend.
  D. a sign of a approaching market peak.
  E. a bullish sign.
  E. a bullish sign.

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  Explanation

  Technical analysts trying to follow the "smart money" sometimes use the proportion of specialists' short sales to total short sales as a market indicator. A decline of the ratio below 30% is viewed as a bullish sign, indicating that specialists are trying to minimize participation in short sales in expectation of a rising market. A increase in the ratio above 50%, conversely, is viewed as a bearish sign.

• Question 2028:

  10 months ago, a firm had leased a downtown office for $5,000 per month. The lease runs for the next 2. 5 years. The current office space of similar size rents at $4,000 per month. If the firm uses the space exclusively for a project over the next 6 months, the opportunity cost related to this equals ________.

  A. $5,000 per month
  B. insufficient information
  C. $4,000 per month
  D. zero
  C. $4,000 per month

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  Explanation

  Opportunity cost is based on current market cost. It does not matter what the firm originally paid or agreed to pay for the property in question. Of course, since taxes are based on actual costs, the afte rtax opportunity cost is definitely affected by historical contracts currently in force.

• Question 2029:

  Under GAAP, when interest rates rise, the carrying value of a long-term bond ________.

  A. remains unchanged
  B. increases
  C. depends on the characteristics of the bond
  D. decreases
  A. remains unchanged

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  Explanation

  Long-term debt is recorded at acquisition cost and historical cost accounting does not allow revaluation. Hence, even though the market value of the debt changes due to a change in interest rates, the book value of the debt changes only at the regular amortization schedule, independent of the market changes.

• Question 2030:

  The peaks and valleys of the business cycle tend to be smoothed out using which inventory method?

  A. weighted average
  B. LIFO
  C. gross profit method
  D. FIFO
  B. LIFO

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  Explanation

  When prices are moving either upward or downward, the cost of goods sold (under LIFO) will show costs closer to the price level at the time the goods were sold. Therefore the LIFO method tends to show a smaller net income during inflationary times and a larger net income during deflationary times than other methods of inventory valuation.