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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2111:

  If you deposit $2,500 into an account paying 6% per year, simple interest, how much is in the account in 18 months?

  A. $2,651.04
  B. $2,725. 00
  C. $2,750.19
  D. $2,349.38
  E. $225. 00
  B. $2,725. 00

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  Explanation

  Since the question asks for how much is in the account, the simple interest earned should be added to the original deposit to find the answer. On the BAII Plus, press 2500 x 0.06 x 18 divide 12 = + 2500 =. On the HP12C, press 2500 ENTER

  0.06 x 18 x 12 divide 2500 + to see the answer.

• Question 2112:

  An economist with Smith, Kleen and Beetchnutty Institutional Brokerage has been examining a stock market series and is trying to determine an appropriate earnings multiplier for the series. In her research, this economist has determined the

  following information:

  The annual dividend at t1 = $1.35

  The EPS at t1 = $5. 10

  The anticipated growth rate of dividends is 12. 5%

  The anticipated growth rate of earnings is 14%

  The required rate of return is 15. 75%

  Using this information, what is the appropriate earnings multiplier for this stock market series? Further, what is the appropriate value for this stock market series? Choose the best answer.

  A. None of these answers is correct.
  B. 14. 93; $76. 13
  C. The answer cannot be determined from the information provided.
  D. 7. 74; $39.46
  E. 8.14; $41.51
  F. 15. 13; $77. 16
  E. 8.14; $41.51

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  Explanation

  The appropriate earnings multiplier is found to be 8.14. Estimating the earnings multiplier for a stock market series requires the estimation of each of the following components:

  1. The dividend payout ratio.

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

  3. 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, the dividend payout ratio must be calculated based on the anticipated dividend at t1 and the projected EPS figure for t1. The calculation of the dividend payout ratio

  is as follows: {D/E = [$1.35 / $5. 10] = 0.264706}. Now that the dividend payout ratio has been determined, the appropriate earnings multiplier is found as follows: {P/E = [0.264706/ (0.1575 - 0.125)] = 8.14. Notice that it is the anticipated

  growth rate of dividends, not the anticipated growth rate of earnings, which is used in the determination of the earnings multiplier.

  Multiplying this figure by the projected EPS will lead to an appropriate value of $41.51 for this series.

• Question 2113:

  The earnings multiplier is also known as

  A. the operating leverage ratio.
  B. the profit margin multiplied by the total asset turnover.
  C. the P/E ratio.
  D. the ROE ratio.
  C. the P/E ratio.

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  Explanation

  The earnings multiplier, which is the basis for a method of valuing stocks, is also known as the price / earnings (P/E) ratio. It is usually set equal to the current market price divided by expected 12-month earnings.

• Question 2114:

  How much would an original deposit of $2,500 grow to be after 6 and a half years, if the deposit earns interest at 8.5% per year, compounded monthly?

  A. $4,335. 53
  B. $5,541.02
  C. $3,601.34
  D. $10,183. 49
  E. $3,570.42
  A. $4,335. 53

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  Explanation

  On the BAII Plus, press 2500 PV, 0 PMT, 78 N, 8.5 divided by 12 = I/Y, then press CPT FV. On the HP12C, press 2500 PV, 0 PMT, 78 n, 8.5 ENTER 12 divide i, then press FV. The answer will be displayed as a negative number. Make sure that the BAII Plus has the P/Y value set to 1.

• Question 2115:

  The loss from an uncollectible account is

  A. an asset
  B. a regular expense of doing business
  C. a liability
  D. a reduction in revenue
  B. a regular expense of doing business

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  Explanation

  The benefit from selling on credit to customers far outweighs the cost of losses from uncollectible accounts. These losses are a regular expense of doing business.

• Question 2116:

  What does the complement rule state?

  A. P(A) = 1 - P(not A)
  B. None of these answers
  C. P(A) = P(A) - P(B)
  D. P(A) = P(A) x P(B)
  E. P(A) = P(A) + P(B)
  A. P(A) = 1 - P(not A)

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  Explanation

  The sum of probability must equal 1. So P(A) + P(not A) = 1.

• Question 2117:

  Which of the following represents a "smart money" technical indicator? Choose the best answer.

  A. Percentage of futures traders bullish on stock index futures.
  B. Diffusion Index.
  C. T-Bill-Eurodollar Yield Spread.
  D. More than one of these answers is correct.
  E. Breadth of market.
  F. Block Uptick/Downtick Ratio.
  C. T-Bill-Eurodollar Yield Spread.

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  Explanation

  Of the choices listed, only the "T-Bill-Eurodollar Yield Spread" represents a "smart money" technical indicator. The T-Bill-Eurodollar Yield Spread is used by technical analysts to measure investor sentiment (i.e. confidence) on a global scale. Specifically, during times of international crisis, there is usually a "flight to quality" personified by a bidding up on U.S. Treasury issues. This will cause a widening of the spread between U.S. T-Bills and Eurodollars, causing a decline in this ratio. Technical analysts would view a sharp increase in the spread between T-Bills and Eurodollars as indicative of an upcoming market trough, and historical evidence has tended to support this belief. "Breadth of market" refers to the measure of advancing versus declining issues. The "Diffusion Index" is a measure of market breadth and is defined as the volume of advancing issues plus one-half of the volume of unchanged issues, divided by the total number of issues traded. Short interest measures the total volume of outstanding short positions, and the sentiment of futures traders is used by contrarian technical analysts, who take a contra approach. The "Block Uptick/ Downtick Ratio" is used to measure the near-term sentiment of institutions.

• Question 2118:

  Which of the following is not expressly incorporated into the Degree of Total Leverage (DTL) calculation?

  A. None of these answers
  B. Discount rate
  C. Interest expense
  D. Fixed costs
  E. Sales
  F. Variable costs
  B. Discount rate

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  Explanation

  The Degree of Total Leverage (DTL) calculation measures the percentage change in EPS from a given percentage change in sales. The equation used to produce DTL is as follows: {DTL = [(Sales - Variable Costs) / (Sales - Variable Costs Fixed Costs - Interest Expense)]. As you can see, the DTL calculation does not involve the use of an explicit discount rate.

• Question 2119:

  Acquire Corp. has a business model based on making accretive acquisitions each year. The company has historically been successful in implementing its strategy. Earnings per share have grown each of the last five years at a 15% compounded rate. During the past year, Acquire Corp. acquired a services company with large net operating losses, representing a third leg to its business model. The other two business segments are engineering construction and mining. The purchase price was one-half the company's current market value. The most appropriate technique to value Acquire Corp. is based on its:

  A. price-to-book value ratio
  B. forward price-to-earnings ratio
  C. trailing price-to-sales ratio
  B. forward price-to-earnings ratio

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  Explanation

• Question 2120:

  The asset allocation for a country within a ________ portfolio will be affected by its economic outlook; countries approaching a recession will be ________.

  A. local; overweighted
  B. global; underweighted
  C. local; underweighted
  D. global; overweighted
  B. global; underweighted

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  Explanation

  Monetary and fiscal policies enacted by national governments influence the countries' aggregate economies, which, in turn, influence all industries and companies within the economies. Some examples are government spending's multiplier effect and the raising of firms' costs due to restrictive monetary policies. Taking a global perspective, the asset allocation for a country within a global portfolio will be affected by its economic outlook - countries approaching a recession will be underweighted, while optimistic economic outlooks would cause an investor to overweight the country.