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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2091:

  Carl Pagan lives in Meesopotamia, where insider trading is not considered a crime. His friend, Ann Dreen, lives in Gondwana, where an investment professional must report any knowledge of criminal activity to the appropriate authorities. The AIMR code of ethics bars insider trading but does not require one to report criminal activity to authorities. With regard to insider trading, Carl must follow ________ and with respect to reporting of criminal activity, Ann must follow ________.

  A. Meesapotamian law; AIMR code
  B. AIMR code; Gondwana law
  C. Meesapotamian law; Gondwana law
  D. AIMR code; AIMR code
  B. AIMR code; Gondwana law

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  Explanation

  A member must always abide by the AIMR code, unless the local laws in any given case are stricter, in which case, the stricter standard applies. Standard I.

• Question 2092:

  Level I verification requires independent attestation that the requirements of the AIMR-PPS have been met on a(n) ________ basis.

  A. international
  B. attainable
  C. nationwide
  D. firmwide
  D. firmwide

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  Explanation

  This is a requirement under Level I verification procedures.

• Question 2093:

  How much would you need to deposit today in order to be able to withdraw $2,500 in 2 years and $1,500 in 5 years, if the account has nothing in it today and interest is 8% per year, compounded annually?

  A. $2,722. 33
  B. $3,429.36
  C. $3,164. 22
  D. $4,000.00
  E. $3,378.18
  C. $3,164. 22

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  Explanation

  Work this question as two compound interest problems. On the BAII Plus, press 2 N, 8 I/Y, 0 PMT, 2500 FV, CPT PV, which yields $2,143. 35. Then press STO 1. Then press 5 N, 1500 FV, CPT PV, which yields $1,020.87. Then press + RCL 1 = to see the answer. On the HP12C, press 2 n, 8 i, 0 PMT, 2500 FV, PV. Then press STO 1. Then press 5 n, 1500 FV, PV. Then press RCL 1 + to see the answer. Note that the answer will be displayed as a negative number.

• Question 2094:

  Level II verifiers must obtain and review ________ to ensure proper recording of cash flows.

  A. end of period returns
  B. accounting methods
  C. bank reconciliation
  D. cash flow statements
  C. bank reconciliation

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  Explanation

  This procedure must be carried out to determine whether capital contributions and withdrawals that are used in the performance calculations are recorded in the proper accounts, at the right amounts and on a timely basis.

• Question 2095:

  When a plant asset is sold for less than its book value

  A. cash received plus accumulated depreciation plus loss on disposal equals the original cost
  B. original cost minus accumulated depreciation equals cash received minus loss on disposal
  C. book value of the asset plus loss on disposal equals cash received
  D. cash received plus accumulated depreciation minus loss on disposal equals the original cost
  A. cash received plus accumulated depreciation plus loss on disposal equals the original cost

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  Explanation

  Gain or loss on disposal of a fixed asset is calculated by subtracting the book value (Original cost - Accumulated Depreciation) from the cash received.

• Question 2096:

  Standard I of the Standards of Professional Conduct deals with ________.

  A. None of these answers
  B. Fundamental Responsibilities
  C. Fiduciary Duties
  D. Priority of Transactions
  E. Plagiarism
  B. Fundamental Responsibilities

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  Explanation

  Standard I of the Standards of Professional Conduct deals with Fundamental Responsibilities.

• Question 2097:

  If you deposit $202. 50 today into an account paying 6% per year simple interest, how much interest will you have earned in 2 years?

  A. $2. 50
  B. $20.50
  C. $24. 30
  D. $24. 00
  E. 226. 80
  C. $24. 30

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  Explanation

  Since this is a simple interest question, the formula is I=PRT, with T here being 2, since the timeframe is 2 years. On the BAII Plus, press 202. 50 x 0.06 x 2 = to see the answer. On the HP12C, press 202. 50 ENTER 0.06 x 2 x to see the answer. Since the question asks for the amount of interest earned, the original deposit should not be added to this value.

• Question 2098:

  The ROE equals:

  I. profit margin times equity turnover.

  II. profit margin times asset turnover times financial leverage.

  III.

  financial leverage times sales-to-debt ratio.

  A. none of these answers
  B. II and III
  C. I and II
  D. I, II and III
  C. I and II

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  Explanation

  ROE = Net income/Equity

  = (Net income/sales)*(sales/equity)

  = (profit margin)*(equity turnover).

  You can also express this as:

  ROE = Net income/Equity

  = (Net income/sales)*(sales/total assets)*(total assets/equity)

  = (profit margin)*(asset turnover)*(financial leverage)

• Question 2099:

  High payout ratios are closely correlated with which of the following attributes?

  A. The level of competition in the industry.
  B. More than one of these answers is correct.
  C. The growth rate of earnings.
  D. Maturity of the industry.
  E. All of these answers are correct.
  F. The level of regulation in an industry.
  B. More than one of these answers is correct.

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  Explanation

  All but one of these answers is correct. Specifically, the dividend payout ratio is very closely related to the maturity of the industry, the level of competition in the industry, and the growth rate in earnings. Remember that all of these factors are interrelated. As an industry becomes more mature, competition becomes maximized, margins shrink, and the growth potential of the industry declines. This will lead to a decrease in positive NPV investment opportunities in the industry, forcing firms to increase the proportion of earnings paid out to shareholders in the form of dividends. The level of regulation in an industry is not necessarily highly correlated with the dividend payout ratio of firms within the industry. For example, the financial services industry is very heavily regulated, yet firms within this sector do not pay a disproportionate amount of their earnings as dividends. However, he utility industry, also heavily regulated, pays a very high proportion of earnings as dividends.

• Question 2100:

  Louisiana Enterprises, an all-equity firm, is considering a new capital investment. Analysis has indicated that the proposed investment has a beta of 0.5 and will generate an expected return of 7 percent. The firm currently has a required return of 10.75 percent and a beta of 1.25. The investment, if undertaken, will double the firm's total assets. If k(RF) = 7 percent and the market return is 10 percent, should the firm undertake the investment?

  A. No; the expected return of the asset (7%) is less than the required return (8.5%).
  B. Yes; the expected return of the asset (7%) exceeds the required return (6. 5%).
  C. Yes; the beta of the asset will reduce the risk of the firm.
  D. No; the risk of the asset (beta) will increase the firm's beta.
  E. No; the expected return of the asset is less than the firm's required return, which is 10.75%.
  A. No; the expected return of the asset (7%) is less than the required return (8.5%).

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  Explanation

  Calculate the required return and compare to the expected return.

  k(s) = k(RF) + (k(M) - k(RF))b = 0.07 + (0.10 - 0.07)0.5 = 0.085 = 8.5%.

  The expected return of the asset (7%) is less than the required return (8.5%) so the investment should not be made.