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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2051:

  Given the following four points: (-2, 0), (-1,0), (0,1), (1, 1) and (2, 3)

  What is the standard error of the regression line estimate?

  A. None of these answers
  B. 0.135
  D. 0.606
  E. 0.367
  C

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  Explanation

  For this, you need to create tables with columns for X,Y,XY,X^2,Y' and Y-Y'. This will be as follows.

  XYXY X^2 Y'Y-Y' -2004-0.40.4 -10010.3-0.3 010010 11111.7-0.7 23642. 40.6 Sum057100

  N=5.

  The regression equation is Y' = a + bX.

  The standard error of estimate is

  s = sq. root of [S(Y-Y')^2/n-2] where S stands for "Sum of." S = [0^2/3] = 0.

• Question 2052:

  Which of the following should be taken into account when estimating country risk?

  I.Political risk II.Expropriation risk III.Currency risk IV.Economic environment V.Inflation trends VI.Trade policy VII.Consumer tastes

  A. I, III, IV, V, VII
  B. I, II, III,
  C. I, II, III, IV, V, VI, VII
  D. II, IV, V
  E. I, III, III, IV, V, VII
  F. None of these choices are correct
  C. I, II, III, IV, V, VI, VII

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  Explanation

  In assessing country risk, one must consider various sources of risk and instability prevalent within the country being examined. The two basic components of country risk are political risk and financial risk. However, there are many considerations in assessing country risk that exist beyond the boundaries of simple classification. For instance, attitudes of consumers must be taken into effect, as well as such things as trends in consumer spending, unemployment rates, threats of ideological instability, etc. So said, the determination of a finite "country risk premium" is often a complex and daunting task. When assessing a country risk premium, the five sources of risk must be considered (business risk, financial risk, liquidity risk, exchange rate risk, and country risk).

• Question 2053:

  Which of the following about Free Cash Flows (FCFs) is TRUE?

  A. FCF = Cash from operations - outlays for replacement of used capacity.
  B. FCF = Cash from operations - outlays for maintenance of current capacity - dividends declared.
  C. FCF = Cash from operations - outlays for dividend payments and scheduled debt retirement
  D. FCF = Net Income + Non-cash expenses.
  B. FCF = Cash from operations - outlays for maintenance of current capacity - dividends declared.

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  Explanation

  FCF = Cash flows from operations - Net capital expenditures required to maintain productive capacity - Dividends on preferred stock and common stock (assuming a payout policy).

• Question 2054:

  "Operating leverage" refers to:

  A. the degree of reliance on debt capital.
  B. none of these answers.
  C. the extent to which changes in sales revenues affect operating profits.
  D. the extent to which operating profits are affected by variable costs.
  C. the extent to which changes in sales revenues affect operating profits.

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  Explanation

  Operating leverage is the extent to which changes in sales revenues affect operating profits.

• Question 2055:

  The length of time required for an investment's cash flows, discounted at the investment's cost of capital, to cover its cost is known as ________.

  A. Weighted Average Cost of Capital (WACC)
  B. Payback Period
  C. Discounted Payback Period
  D. Net Present Valuing
  E. Optimal Capital Structure
  F. Capital Budgeting
  C. Discounted Payback Period

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  Explanation

  Discounted Payback Period is defined as the length of time required for an investment's cash flows, discounted at the investment's cost of capital, to cover its cost.

• Question 2056:

  Which is true of a leptokurtic distribution?

  I. It will be more peaked than the normal distribution.

  II. It will have thinner tails than the normal distribution.

  III. It will be less peaked than the normal distribution.

  IV.

  It will have fatter tails than the normal distribution.

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

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  Explanation

  I and IV are true of leptokurtic distributions. This is also called having "excess kurtosis." II and III are characteristic of platykurtic distributions.

• Question 2057:

  Suppose the firm's WACC is stated in nominal terms, but the project's expected cash flows are expressed in real dollars. In this situation, other things held constant, the calculated NPV would

  A. possibly have a bias, but it could be upward or downward.
  B. more information is needed; otherwise, we can make no reasonable statement.
  C. be biased upward.
  D. be biased downward.
  E. be correct.
  D. be biased downward.

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  Explanation

  Given the fact that there is inflation, a cost of capital stated in nominal terms would understate the calculated NPV. If inflation is expected, but this expectation is not built into the forecasted cash flows, then the calculated NPV will be downward biased.

• Question 2058:

  Los Angeles Lumber Company (LALC) is considering a project with a cost of $1,000 at time = 0 and inflows of $300 at the end of Years 1 - 5. LALC's cost of capital is 10 percent. What is the project's modified IRR (MIRR)?

  A. 15. 2%
  B. 12. 9%
  C. 20.7%
  D. 10.0%
  E. 18.3%
  B. 12. 9%

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  Explanation

  Tabular/Numerical solution:

  TV = $300(FVIFA(10%,5)) = $300(6. 1051) = $1,831.53.

  $1,000 = TV/(1 + MIRR)^5

  $1,000 = $1,831.53/(1 + MIRR)^5

  (1 + MIRR)^5 = 1.83153

  MIRR = 12. 866%.

• Question 2059:

  Under accrual accounting, which of the following is/are correct?

  I. Revenues are recognized when cash is received.

  II. Expenses do not always involve cash flows.

  III. Revenues and the related costs are matched in the same period.

  IV.

  The reported income is a good indicator of the firm's current performance.

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

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  Explanation

  Accrual accounting requires that revenues and gains be recognized when earned and expenses and losses be recognized when incurred. Hence, revenue recognition is completely separate from cash flows. In the sales process, the earnings process is completed when goods are delivered and that's when revenue is recognized under accrual accounting.

• Question 2060:

  The dividend discount model assumes that

  A. dividends must be discounted in favor of earnings to arrive at the correct valuation for common stock.
  B. the value of a share of common stock is the present value of all future earnings.
  C. the value of a share of common stock is the present value of all future dividends.
  D. dividends are worth more in the future than in the present.
  C. the value of a share of common stock is the present value of all future dividends.

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  Explanation

  The dividend discount model (Dividend Discount Model) assumes that the value of a share of common stock is the present value of all future dividends, not earnings. The Dividend Discount Model assumes that a dollar today is worth more than a dollar tomorrow.