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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2031:

  Which of the following is not necessary to determine the price/earnings ratio for a stock market series?

  A. All of these are necessary to determine the P/E ratio for a stock market series.
  B. The dividend at D1. C. The EPS figure at t1. D. The expected growth rate of dividends.
  E. The required rate of return.
  A. All of these are necessary to determine the P/E ratio for a stock market series.

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  Explanation

  All of the choices listed are components in the equation used to determine the earnings multiplier of a stock market series, as shown below:

  P/E = [(D1 / E1) / (k-g)

  Where: D1 = the annual per-share dividend at t1, E1 = the EPS figure at t1, k = the required rate of return on common stock, and g = the expected growth rate of dividends.

• Question 2032:

  Why is book value per share important?

  A. Because it is frequently used in assessing merger terms.
  B. All of these answers.
  C. It is the best method of determining the market value of a firm's common stock.
  D. None of these answers.
  E. Book value per share is the "true" value of a firm's common stock.
  A. Because it is frequently used in assessing merger terms.

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  Explanation

  Book value per share is often times used by firms in determining merger terms. Book value per share plays an important role in the analysis of financial statements since one method of valuation begins with the book value per share figure, to which an estimate of future earnings is added. An estimate of the future profitability of a firm can be based directly on the earnings capacity of its asset base.

• Question 2033:

  Mayberry's Mayor, in consultation with the trustees of Mayberry's Village Investment Fund, has decided that the fund needs to become more aggressive in its investment objectives to generate funds for village renovations like a paved road, a new school and an activity center for kids. He discussed these requirements with the plan manager, Otis, and asked him to suggest a suitable risk profile and investment instruments to achieve the objectives within a year. Barney, a businessman from a neighboring town, is trying to decide if he should invest his excess capital in setting up businesses in Mayberry or another town, Februberry. These businesses promise to generate about 35 new jobs at various levels and stimulate consumer spending in the town in which they are set up. Barney wants to be sure that the businesses are set up in areas that have high growth promise. So he calls up Otis to find out about the Mayor's plans for the next two years for Mayberry's development. Otis sets up a meeting with Barney and outlines the proposed renovation projects. Otis does his best to convince Barney that Mayberry is the right place for Barney's businesses.

  I. Barney has violated the Code of Ethics by discussing the plans with Otis.

  II. Otis has violated the Code of Ethics by discussing the plans with Barney.

  III.

  Neither Barney nor Otis violated any standards.

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

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  Explanation

  Otis has violated Standard IV (B.5) - Preservation of Confidentiality by revealing the Mayor's plans to Barney. Any information that Otis receives in his capacity as a fund manager is strictly confidential and should not be revealed unless it is in connection with a criminal investigation or an AIMR investigation. Barney has not violated any Standards.

• Question 2034:

  Which of the following about the multiplier is false?

  A. Idle resources are necessary before the multiplier can bring about an increase in real income.
  B. The size of the multiplier relates directly to the size of the marginal propensity to consume.
  C. It is defined as 1 / (1 - the marginal propensity to save).
  D. It takes time for the multiplier to work.
  C. It is defined as 1 / (1 - the marginal propensity to save).

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  Explanation

  The multiplier is defined as M = 1/(1-MPC) rather than 1 / (1 - MPS).

• Question 2035:

  One of the major benefits of mutual funds is ________.

  A. all of these answers are major benefits
  B. that they provide instant diversification
  C. that they are easily bought and sold
  D. that they have predictable returns
  E. that they are low-risk
  B. that they provide instant diversification

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  Explanation

  One of the major benefits of mutual funds is that they provide instant diversification. They are not necessarily low-risk, as there are many aggressive, speculative funds. Not all funds have high liquidity.

• Question 2036:

  Woodson Inc. has two possible projects, Project A and Project B with the following cash flows: Year Project AProject B 0-150,000-100,000 1100,00045,000 2105,00065,000 340,00080,000 At what cost of capital do the two projects have the same net present value (NPV)?

  A. 34. 8%
  B. 10.3%
  C. 13. 5%
  D. 15. 8%
  E. 21.7%
  E. 21.7%

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  Explanation

  To determine the crossover rate, find the differential cash flows between the 2 projects and then calculate the IRR of those differential cash flows. tProject change, A - B 0-50,000 155,000 240,000 3-40,000 IRR = 21.7%.

• Question 2037:

  Jefferson Blake invests only in bonds and other fixed-income securities. Blake believes there is a good opportunity to purchase an undervalued 4% annual pay corporate bond with three years left until maturity and a par value of $1,000. Blake observes that 1-year, 2-year, and 3-year Treasury strip rates are currently 4. 0%, 4. 5%, and 4. 75%, respectively. What is the maximum price Blake should be willing to pay for the bond?

  A. $1,069.58.
  B. $979.93.
  C. $958.36.
  B. $979.93.

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  Explanation

• Question 2038:

  What percent of the observations will lie above the mean plus two standard deviations?

  A. 5%
  B. 68%
  C. 2. 5%
  D. None of these answers
  E. 95%
  C. 2. 5%

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  Explanation

  95% of the observations lie between plus and minus two standard deviations from the mean. Therefore, 2. 5% lie over and above two standard deviations on each side of the mean.

• Question 2039:

  The following information should be used according to the provisions of SFAS 95 (Statement of Cash flows) and using the following data.

  Net Income $50,000 Provision for bad debts $2,000 Increase in Inventory $1,000 Increase in accounts payable $2,000 Purchase of new equipment $15,000 Sale of equipment for $10,000 gain $20,000 Depreciation expense $5,000 Repurchase of common stock $10,000 Payment of dividend $4,000 Interest payment $3,000

  What is net cash flow from investing?

  A. $10,000
  B. ($15,000)
  C. ($5,000)
  D. $5,000
  D. $5,000

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  Explanation

  Outflow of $15,000 for new equipment and $20,000 inflow from sale.

• Question 2040:

  Assume the following information about a stock market series:

  Retention rate = 63% Expected growth rate of dividends = 10% per year Expected growth rate of earnings = 12% per year Required rate of return = 13% per year Earnings per share next year = $3. 65

  What is the appropriate earnings multiplier for this stock market series? Further, what is the value of this series?

  A. 12. 33; $45
  B. None of these answers is correct.
  C. 21; $76. 65
  D. 63; $229.95
  E. The answer cannot be determined from the information provided.
  F. 37; $135. 05
  A. 12. 33; $45

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  Explanation

  The earnings multiplier is found as 12. 33 for this series, and the value of the series is computed as $45.

  Estimating the earnings multiplier for a stock market series requires the estimation of each of the following components:

  The dividend payout ratio.

  The required rate of return on common stock in the country/region/industry/sector being analyzed.

  The expected growth rate of dividends for the stocks in the country/region/industry/sector being analyzed.

  Once values for each of these components have been determined, they are imputed into the following formula:

  P/E = [D/E / (k - g)]

  Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated growth rate of dividends.

  In this example, all of the necessary information has been provided. However, before the earnings multiplier can be determined, the dividend payout ratio must be found by manipulating the retention rate. Remember that the retention rate is

  equal to (1 - the dividend payout ratio), just as the dividend payout ratio is found as (1 - the retention rate). By this logic, the dividend payout ratio and the retention rate must always add up to one. The dividend payout ratio for this series is

  found as (1 - 0.63) = 0.37.

  Now that the dividend payout ratio has been determined, the calculation of the earnings multiplier is shown below:

  P/E = [0.37 / (0.13 - 0.10)] = 12. 33

  Notice that it is the anticipated growth rate of dividends that is used in this equation, not the anticipated growth rate in earnings.

  Once the earnings multiplier has been determined, the value of this stock market series can be found by multiplying the EPS figure by the earnings multiplier. This will lead to a value of $45 for this stock market series.