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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2151:

  A passive budget deficit is a deficit that

  A. merely reflects a decline in tax revenue during an economic boom.
  B. results from legislative action that reduces tax rates.
  C. results from legislative action that increases government expenditures.
  D. merely reflects a decline in tax revenue during a recession.
  D. merely reflects a decline in tax revenue during a recession.

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  Explanation

  A passive deficit is a good example of an automatic stabilizer. During a recession, government tax revenues fall and expenditures rise. Thus, the preferred and natural state for the government budget during a recession is to be in a deficit in order to stimulate aggregate demand.

• Question 2152:

  MacDonald Inc. reported net income of $300,000 for 1996. Changes occurred in several balance sheet accounts as follows:

  Equipment $25,000 increase

  Accumulated depreciation $40,000 increase

  Note payable $30,000 increase

  Additional information:

  During 1996, MacDonald sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000.

  In December 1996, MacDonald purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000.

  Depreciation expense for the year was $52,000.

  In MacDonald's 1996 statement of cash flows, net cash provided by operating activities is ________.

  A. $347,000
  B. $357,000
  C. $243,000
  D. $340,000
  E. $352,000
  A. $347,000

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  Explanation

  To calculate cash flows from operating activities, net income will be adjusted for noncash items and working capital. Depreciation of $52,000 is added back to net income of $300,000 and the gain on sale of equipment of $5,000 is subtracted from net income. Therefore, the net cash inflow from operating activities is $347,000.

• Question 2153:

  The retail industry has __________ asset turnover ratio compared to that of a capital intensive industry like the auto industry.

  A. a higher
  B. about the same
  C. a higher and lower are both possible
  D. a lower
  A. a higher

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  Explanation

  Total asset turnover = net sales/average total assets Since the auto industry is highly capital intensive compared to the retail industry, it require far more capital assets to generate the same revenues as the retail industry.

• Question 2154:

  When both exports and imports are considered, the major advantage of international trade is that it allows us to

  A. share our technology and efficiency with less-developed countries that would otherwise never have the opportunity to observe modern goods and services.
  B. sample foreign products that many of us would otherwise never see.
  C. consume a larger, more diverse quantity of goods and services at lower prices than would otherwise prevail.
  D. maintain jobs for workers who would otherwise have little to do.
  C. consume a larger, more diverse quantity of goods and services at lower prices than would otherwise prevail.

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  Explanation

  In the absence of trade the consumption of each country is constrained by the country's production possibilities. Trade expands the consumption possibilities of both countries. Specialization and exchange permits two countries to expand their joint output and as a result, both countries can increase their consumption of both all goods.

• Question 2155:

  Under a monetary expansion, aggregate demand can be expected to ________.

  A. stay the same
  B. rise
  C. fall, then rise
  D. fall
  E. rise, then fall
  B. rise

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  Explanation

  Under a monetary expansion, individuals posses more money balances. Since they invest/save more and consume more, aggregate demand increases due to increased consumption.

• Question 2156:

  Porter contends that there are two competitive strategies that dictate how a firm has decided to cope with the five competitive conditions that define an industry's environment. The two competitive strategies are known as ________ and ________.

  A. low-cost strategy, differentiation strategy
  B. lay low strategy, differentiation strategy
  C. low-cost strategy, defensive leadership
  D. low-cost strategy, defensive strategy
  E. none of these answers
  A. low-cost strategy, differentiation strategy

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  Explanation

  Within each industry, the strategies available and the ways of implementing them differ.

• Question 2157:

  The market price of closed-end fund shares are historically ________ the NAV.

  A. about 20 percent premium above
  B. 5 to 10 percent discount to
  C. very close to
  D. none of these answers
  D. none of these answers

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  Explanation

  The NAV and the market price of a closed-end fund are almost never the same, because closed-end funds typically have market prices that has historically been a 5 to 20 percent discount to NAV.

• Question 2158:

  If unemployment was deemed too high by policy makers, which of the following policy tools might be utilized?

  A. decrease the money supply
  B. borrow to finance new military spending
  C. reduce government debt
  D. increase target interest rates
  E. reduce both taxes and government spending
  F. raise tariffs to help domestic workers
  B. borrow to finance new military spending

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  Explanation

  One method to reduce unemployment is to engage in expansionary fiscal policy. This requires the government to spend more than it collects in taxes. The result is a net increase in aggregate demand, which will increase the quantity supplied, and therefore reduce unemployment.

• Question 2159:

  An analyst with Smith, Kleen and Beetchnutty is examining shares of Mission Industries for possible investment. Due to the development of several new products, the growth of Mission Industries is expected to temporarily exceed its long-term

  rate of growth. Specifically, Mission Industries is anticipated to grow at an 18% annual rate for the next three years, then return to its long-term rate of growth of 13% per year.

  The Company recently paid an annual dividend of $0.75, and similar investments have warranted a 14. 5% per year rate of return.

  Using the information provided, what is the value of Mission Industries common stock? Use the two-stage dividend growth rate model.

  A. $80.62
  B. The answer cannot be determined from the information provided.
  C. $81.44
  D. $115. 12
  E. None of these answers is correct.
  F. $64. 16
  F. $64. 16

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  Explanation

  The multi-stage dividend discount model is a more realistic way of valuing fast-growing companies that pay dividends. With this model, it is necessary to estimate the above-average, or "supernormal," rate of growth, as well as the long-term rate of growth. Once these growth rates have been determined, they are used to calculate the anticipated annual dividends leading up to the point at which the growth rate decelerates to the long-run rate of growth.

  Incorporating the given information into the two-stage dividend discount model will yield the following

  P = {[$0.75 * 1.18) / 1.145] + [($0.885 * 1.18) / 1.31103] + [($1.04312 * 1.18) / 1.50112] + [($1.23088 * 1.13) / (.145 - .13)]/1.50112} which can further be developed into: P = {$0.77293 + $0.79655 + $0.81998 + $61.77} = $64. 16

• Question 2160:

  The spread between k and g is the primary determinant of the size of the ________.

  A. Risk-free rate
  B. growth rate
  C. firm
  D. P/E
  D. P/E

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  Explanation

  The spread between k and g is the primary determinant of the size of the P/E.