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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 211:

  The NAV and the market price of ________ are almost never the same.

  A. a low-load fund
  B. an open-end fund
  C. a no-load fund
  D. a closed-end fund
  D. a closed-end fund

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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 212:

  A preferred stock has a $100 par value and a dividend payout of $8 per year. Your required return is 9. What is the value of the preferred stock?

  A. not enough information to calculate it
  B. $88.89
  C. $92. 24
  D. $85. 67
  B. $88.89

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  Explanation

  The value of a preferred stock is the stated annual dividend divided by the required rate of return on preferred stock. In this case, V = $8/.09 = $88.89

• Question 213:

  Contrary-opinion traders expect mutual funds to have a

  A. low percentage of cash near the peak of the market.
  B. high percentage of cash near the peak of the market.
  C. high percentage of cash during a rising market trend.
  D. low percentage of cash during a rising market trend.
  A. low percentage of cash near the peak of the market.

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  Explanation

  Contrary-opinion traders believe that mutual fund managers are usually wrong in their market expectations near peaks or troughs. Mutual fund managers would thus be expected to believe the market would continue to increase when it is near a peak. The managers would have a very low position in cash in order to invest as much as possible in the rising market. When their cash positions are very low, contrary-opinion traders would see this as a sign that the market is approaching a peak and sell shares in anticipation of the upcoming bear market.

• Question 214:

  Sue Wie, CFA, is the chief financial officer for Garth Company. The company will need to borrow S75 million in the near future to fund a plant expansion. Wie expects interest rates will rise and decides to hedge against this risk using a 3 * 6 LIBOR based forward rate agreement (FRA). The underlying rate for this FRA is:

  A. 60-day LIBOR.
  B. 90-day LIBOR.
  C. 180-day LIBOR.
  B. 90-day LIBOR.

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  Explanation

• Question 215:

  Form 10-K is filed with the SEC to update the information a company supplied when filing a registration statement under the Securities Exchange Act of 1934. Form 10-K is a report that is filed

  A. semiannually within 30 days of the end of a company's second and fourth fiscal quarters.
  B. quarterly within 45 days of the end of each quarter.
  C. within 15 days of the occurrence of significant events.
  D. none of these answers.
  E. annually within 90 days of the end of a company's fiscal year.
  E. annually within 90 days of the end of a company's fiscal year.

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  Explanation

  Form 10-K is the annual report to the SEC. It must be filed within 90 days after the corporation's yearend. It must contain audited statements.

• Question 216:

  A high-growth firm is expected to have a dividend growth of 15% for the next 2 years. It is then expected to stabilize at 5%. The firm has just paid a dividend of $1 and investors require a rate of return of 12%. The market price of the firm's stock is ________.

  A. $16. 15
  B. $14. 22
  C. $17. 77
  D. $19.86
  C. $17. 77

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  Explanation

  Since the dividends do not grow at a constant rate, you cannot directly apply the Dividend Discount Model valuation formula. However, note that 2 years from now, looking into the future, you will see a constant growth rate of 5% and the

  dividend 3 years from now will be $1 * 1.15^2 * 1.05 = $1.39. Therefore, the stock price 2 years from now, using the required rate of return of 12%, will equal P = 1.39/(12% - 5%) = $19.86. Thus, the current stock price equals 1.15/1.12 +

  (1.15/1.12)^2 + 19.86/1.12^2 = $17. 77.

  Note that you must be very careful about the time line. In the Dividend Discount Model valuation formula, the price at time t uses the dividend paid at time (t+1). That's the reason we had to use the dividend paid in year 3 to calculate the price

  at the end of year 2.

• Question 217:

  A firm has convertible bonds, preferred equity, common equity and straight bonds in its capital structure. Its net income equals 7,800. The interest payments on straight debt equal 423 and that on convertible debt equals 680. The preferred equity holders received 220 in dividends. If the weighted number of shares for Diluted EPS equals 1,300 and the firm is in the 40% tax bracket, the Diluted EPS equals _________. Assume the convertibles are dilutive.

  A. 5. 31
  B. 6. 14
  C. 5. 52
  D. 6. 35
  B. 6. 14

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  Explanation

  The earnings available for distribution amongst common stock holders and convertible bond holders equals Net income - preferred dividends + interest payments on convertible net of taxes. Therefore, earnings in the numerator = 7,800 - 220 +680*(1-40%) = 7,988. The Diluted EPS then equals 7,988/1,300 = 6. 14.

• Question 218:

  The ________ assumption must be disclosed if results are presented after taxes.

  A. composite
  B. tax rate
  C. settlement-date
  D. selection
  E. trade
  B. tax rate

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  Explanation

  To be in compliance with the PPS, a firm's presentation of its investment performance must disclose the tax rate information.

• Question 219:

  Congress proposes to stimulate the economy by cutting taxes for middle income families but raising taxes for wealthier tax payers. The effect will be the same net taxes collected, but most tax payers would pay less in taxes. According to which of the following economic theories would this stimulate the economy?

  I. fiscal policy

  II. supply-side

  III.

  monetary policy

  A. I, III
  B. none of these answers is correct
  C. III only
  D. I, II, III
  E. I only
  F. II only
  B. none of these answers is correct

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  Explanation

  Since there was no net reduction in taxes, the tax plan would not create a fiscal stimulus. Marginal tax rates have effectively increased under this plan, implying a negative supply-side impact. Monetary policy involves changing the money supply, which is not applicable here.

• Question 220:

  In futures markets, the role of the clearing house is to:

  A. prevent arbitrage and enforce federal regulations.
  B. act as guarantor to both sides of a futures trade.
  C. reduce transaction costs by making contract prices public.
  B. act as guarantor to both sides of a futures trade.

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  Explanation