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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2161:

  According to the contrarians, if a large number of investment advisory services are bullish, it implies:

  I. the market is reaching a peak.

  II. the onset of a market decline.

  III.

  the beginning of a bull market.

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

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  Explanation

  Contrarians believe that most market participants make wrong investment decisions as the market approaches the peak or trough in a cycle. Therefore, if a large number of advisory services are bullish, they believe that the market is about to turn bearish after having reached a peak.

• Question 2162:

  Jones Rutherford, a portfolio manager with Churn Brothers Brokerage, has been examining a stock market series and is trying to determine an appropriate earnings multiplier for the series. In this analysis, Jones has amassed the following information:

  The next estimated annual dividend per share = $2. 30 The estimated earnings per share next year = $4. 85 The anticipated growth rate of dividends is 10% per year The anticipated growth rate of earnings is 9% per year The required rate of return is 14% per year

  Given this information, what is the appropriate earnings multiplier for this stock market series?

  A. The answer cannot be determined from the information provided.
  B. None of these answers is correct.
  C. 9.48
  D. 10.51
  E. 13. 14
  F. 13. 04
  B. None of these answers is correct.

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  Explanation

  The appropriate earnings multiplier for this stock market series is found as 11.86, therefore none of these answers is correct.

  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, 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 = [$2. 30 / $4. 85] = 0.474227

  Now that the dividend payout ratio has been determined, the appropriate earnings multiplier is found as follows:

  P/E = [0.474227/ (0.14 - 0.10)] = 11.86

  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.

• Question 2163:

  A support level

  A. is the price range below the current price at which the technical analyst would expect the stock to get an added boost of demand, keeping its price from falling below that range. The support level is usually near the 12-week low.
  B. is the price range below the current price at which the technical analyst would expect the stock to get an added boost of demand, keeping its price from falling below that range. A support level usually develops after the stock has had a meaningful price increase, and has begun to experience some profit taking.
  C. is the price range above the current price at which the technical analyst would expect the stock to get an added boost of demand, pushing it to even higher prices. The support level is usually near the 52-week high. Investors tend to expect a stock that has broken through its 52-week high to continue increasing.
  D. is the price range below the current price at which the technical analyst would expect the stock supply to increase, pushing down its price below that range. A stock nearing that range would be a good candidate for short selling because of the negative price support that it would receive.
  B. is the price range below the current price at which the technical analyst would expect the stock to get an added boost of demand, keeping its price from falling below that range. A support level usually develops after the stock has had a meaningful price increase, and has begun to experience some profit taking.

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  Explanation

  A support level is viewed as something of a safety net by technical analysts. They believe that at some price range there will be an increase in demand by investors who did not purchase the stock prior to its price increase and who have been waiting for a small reversal to invest. When the stock price falls within that range, there will be a surge in demand as they purchase the stock.

• Question 2164:

  Which of the following statements is most correct?

  A. When equipment is sold, companies receive a tax credit as long as the salvage value is less than the initial cost of the equipment.
  B. None of the answers are correct.
  C. In estimating net cash flows for the purpose of capital budgeting, interest and dividend payments should not be included since the effects of these items are already included in the weighted average cost of capital.
  D. Capital budgeting analysis for expansion and replacement projects is essentially the same because the types of cash flows involved are the same.
  E. All of the answers are correct.
  C. In estimating net cash flows for the purpose of capital budgeting, interest and dividend payments should not be included since the effects of these items are already included in the weighted average cost of capital.

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  Explanation

  Interest payments should not be included in the estimated cash flows because the effects of debt financing are reflected in the cost of capital used to discount the cash flows. If interest was subtracted from the cash flows, and then the remaining cash flows were discounted, the cost of debt would be double-counted.

• Question 2165:

  A loss contingency should be accrued on a company's records only if it is

  A. reasonably possible that a liability has been incurred and the amount of the loss is known.
  B. remotely probable that a liability has been incurred but the amount of the loss can be reasonably estimated.
  C. probable that a liability has been incurred and the amount of the loss is unknown.
  D. none of these answers.
  E. probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
  E. probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

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  Explanation

  Loss contingencies should be accrued when information available prior to the issuance of financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred, and the amount of the loss can be reasonably estimated.

• Question 2166:

  If the p-value is ________ the significance level, the null hypothesis ________.

  A. less than; can be rejected
  B. none of these answers
  C. more than; can be rejected
  D. less than; cannot be rejected
  A. less than; can be rejected

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  Explanation

  The lowest significance level at which the null hypothesis can be rejected is called the p-value of the test. Thus, if the p-value is less than the significance level, the null hypothesis can be rejected at that significance level. To fix this in your mind, think about the p-value as the maximum probability that the null hypothesis is true despite observing the value of the test statistic that you have in the sample at hand. For e.g., suppose the p-value for a given sample turns out to be 3%. Then, if you reject the null, the probability that you have made an error in rejecting it is at most 3%. Clearly, if a critic asked you, "Is the probability that you have made an error less than 5%?" your answer would be, "yes." The critic will then conclude that your test is significant at the 5% level and perhaps even at a lower level.

• Question 2167:

  Which of the following statements is most correct?

  A. All of the answers above are correct.
  B. An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.
  C. A reduction in the corporate tax rate is likely to increase the debt ratio of the average corporation.
  D. None of these answers are correct.
  E. If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.
  D. None of these answers are correct.

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  Explanation

  A major reason for using debt is that interest is deductible, which lowers the effective cost of debt. Lowering the corporate tax rate reduces the tax advantages of debt leading firms to use less debt financing. If the personal tax rate were to increase, individuals would now find interest received on corporate debt less attractive, causing firms to utilize less debt financing. An increase in the costs of bankruptcy might lead firms to use less debt in order to reduce the probability of having to incur these higher costs.

• Question 2168:

  If the expected return on the market portfolio increases, the price of a firm's share ______, all else equal.

  A. can be all of these answers.
  B. is not affected
  C. decreases
  D. increases
  C. decreases

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  Explanation

  In the usual notation, Po = D1/(k-g). Therefore, if the expected return on the stock, k, increases and all else remains constant, the price will fall. The expected return on the stock, k, increases if the market's expected rate of return increases.

• Question 2169:

  Ace Consulting, a multinational corporate finance consulting firm, is examining the sales potential for a new line of industrial motors developed by Clay Industries, a large industrial firm. In their analysis, Ace Consulting meets with the management of Clay Industries, and asks these individuals to specify the worst "reasonable" set of circumstances, along with the best "reasonable set." These figures are measured against the predetermined "base case" situation. Which of the following choices best describes this technique for measuring stand-alone risk?

  A. Case study analysis
  B. Sensitivity analysis
  C. Monte Carlo simulation
  D. Relational analysis
  E. Scenario analysis
  F. Regression analysis
  E. Scenario analysis

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  Explanation

  Scenario analysis is a risk analysis technique that considers both the sensitivity of NPV to changes in key variables and the likely range of key variable values. In a scenario analysis, a financial analyst asks operating or other managers to identify the best and worst "reasonable" situations, and these situations are examined against the predetermined "base case."

• Question 2170:

  A financial analyst is examining shares of Floweration.com, a sprawling Internet "dot com" company, in an attempt to evaluate the firm for possible investment. In her analysis, the financial analyst has determined the following information for the most recent fiscal year: Sales $2,250,000 Total fixed cost $1,300,000 Total variable cost $305,000 Interest expense $5,750 EBIT $645,000 Amortization expense $4,550 Given this information, what is the Degree of Total Leverage for Floweration.com?

  A. 2. 843
  B. 3. 064
  C. 1.731
  D. 3. 488
  E. 3. 043
  E. 3. 043

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  Explanation

  The Degree of Total Leverage (DTL) demonstrates how a given change in sales will impact a firm's EPS. The equation used for calculating the DTL is as follows: {[Sales - variable costs] / [sales - variable costs - fixed costs - interest expense]}. Incorporating the given values for these components into the DTL equation yields the following: {[Sales $2,250,000 - variable costs $305,000] / [sales $2,250,000 - variable costs $305,000 - fixed costs $1,300,000 - interest expense $5,750]}=3. 043. While somewhat intuitively appealing, "EBIT" and "amortization expense" are not explicitly incorporated into the DTL equation.