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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2201:

  When an investment manager's client instructs the manager to use the client's brokerage to purchase goods or services for the client, this is known as:

  A. horizontal brokerage and does not violate any fiduciary duty.
  B. horizontal brokerage and violates the manager's fiduciary duty.
  C. directed brokerage and does not violate any fiduciary duty.
  D. straight brokerage and does not violate any fiduciary duty.
  E. straight brokerage and violates the manager's fiduciary duty.
  F. directed brokerage and violates the manager's fiduciary duty.
  C. directed brokerage and does not violate any fiduciary duty.

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  Explanation

  When an investment manager's client instructs the manager to use the client's brokerage to purchase goods or services for the client, this is known as directed brokerage. Because brokerage is an asset of the client and the brokerage is used to benefit that client, not the manager, such practice does not violate fiduciary duty.

• Question 2202:

  In the direct method statement of cash flows, the primary component of investing cash flow is typically

  A. dividend payments.
  B. long-term investments in securities.
  C. capital expenditures for long-term assets.
  D. repayment of debt.
  E. investments in affiliates.
  C. capital expenditures for long-term assets.

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  Explanation

  Capital expenditures for long-term assets such as plant and machinery are usually the primary component of investing cash flow.

• Question 2203:

  If the net cash inflow = $12,000, Investing cash flow = $(4,000) and operating cash flow = $7,000, the financing cash flow equals ________.

  A. $9,000
  B. $23,000
  C. $15,000
  D. $12,000
  A. $9,000

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  Explanation

  financing cash flow = 12,000 - (-4,000) - 7,000 = $9,000

• Question 2204:

  Assume the following information about a large pharmaceutical company.

  Net income / sales = 0.22 Total assets / common equity = 1.43 Sales / total assets = 0.65 Dividend payout ratio = 0.20

  What is the expected annual growth rate of this firm's dividends?

  A. 16. 36%
  B. None of these answers is correct.
  C. The answer cannot be determined from the information provided.
  D. 4. 09%
  E. 8.00%
  F. 38.72%
  A. 16. 36%

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  Explanation

  A popular model for determining the growth rate of dividends is the following: g = RR * ROE

  Where: g = the expected growth rate of dividends, RR = the retention rate (this is equal to 1 - dividend payout ratio), and ROE = the return on equity.

  Although it may at first appear otherwise, all of the necessary information has been provided. Remember the Du Pont decomposition process for ROE, which breaks down the ROE figure into the following:

  ROE = (Net Income / Sales) * (Sales / Total Assets) * (Total Assets * Common Equity)

  Mathematically, this will break down into (Net Income / Common Equity) --- the ROE figure. The calculation of the return on equity for this company is as follows:

  ROE = [0.22 * 0.65 * 1.43] = 0.204490, or 20.45%.

  Now that the ROE figure has been determined, the calculation of the growth rate of dividends is as follows:

  g = [(1 - 0.20) * 0.2045] = 16. 36%

• Question 2205:

  As the alternative mean approaches the hypothesized mean, what can we say about the risk?

  A. Smaller risk of a Type II error
  B. Greater risk of a Type II error
  C. Smaller risk of a Type I error
  D. None of these answers
  E. Greater risk of a Type I error
  B. Greater risk of a Type II error

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  Explanation

  When the alternative mean approaches the hypothesized mean, there is a greater possibility of accepting the null when it is actually false since they are close together.

• Question 2206:

  Consider the following information for Company XYZ:

  Current Price of Stock $35. 00

  Expected dividend in 1 Year $1.20

  Growth rate 7. 2%

  Beta 1.6

  Risk Free Rate 4. 5%

  Expected Market Return 15%

  Marginal Corporate Tax rate 34%

  Bond Yield 12. 34%

  Calculate this company's cost of retained earnings using the Discounted Cash Flow (DCF) method.

  A. 10.63%
  B. 11.52%
  C. 13. 30%
  D. 9.20%
  E. 12. 0%
  F. 21.30%
  A. 10.63%

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  Explanation

  The DCF method for estimating the cost of retained earnings states: Cost of Retained Earnings = (Dividend for period 1 / Current Price) + Growth Rate. In this case the estimated Cost of Retained Earnings = (1.2 / 35. 00) + 7. 2% = 3. 43 + 7. 2 = 10.63%

• Question 2207:

  In a statistical regression estimation, the R-square is found to be 39% and the slope coefficient is -0.3. The percentage of variance of the dependent variable not explained equals ________.

  A. 0.30
  B. 0.61
  C. 0.09
  D. 0.39
  B. 0.61

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  Explanation

  The R-square of the regression measures the amount of variance of the dependent variable explained by the independent variable. This is given to be 39%. Hence, the amount not explained equals 100% - 39% = 61%.

• Question 2208:

  Assume you buy a car for $20,000 today and agree to pay $200 a month, beginning next month, for 4 years with a final payment also due 4 years from today to pay off any remaining balance. How large will that final payment be, if interest accrues at 5. 9% per year, compounded monthly?

  A. $19,590.32
  B. $24,280.77
  C. $19,204. 41
  D. $10,400.00
  E. $14,511.19
  E. $14,511.19

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  Explanation

  There are 48 months in 4 years. This is a problem known as a balloon payment. On the BAII Plus, press 48 N, 5. 9 divide 12 = I/Y, 20000 PV, 200 +/- PMT, CPT FV. On the HP12C, press 48 n, 5. 9 ENTER 12 divide i, 20000 PV, 200 CHS PMT, FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 2209:

  Which is not a true statement concerning the empirical evidence of mutual fund performance?

  A. sub-par performance is associated with low expense ratios
  B. managers can forecast large changes in the market
  C. all of these answers are false
  D. most fund managers achieved gross returns lower than the DJIA
  E. risk is not consistent with fund objectives
  F. all of these answers are true
  C. all of these answers are false

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  Explanation

  All of these are false. The opposite is true in all answers.

• Question 2210:

  Standard IV (B.4), Priority of Transactions, suggests implementing "________" in certain organizations to limit the number of access persons.

  A. Gag Orders
  B. Limit Orders
  C. Poison Pills
  D. Token Confines
  E. Fences
  F. Fire Walls
  G. Corrals
  F. Fire Walls

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  Explanation

  Access or covered persons have knowledge of pending or actual investment recommendations or action. The firm's definition of access (covered) person should be broad enough to cover all people with that knowledge. Implementing "Fire Walls' - physical and procedural barriers to prevent the flow of information from one group to another - may be appropriate in certain organizations to limit the number of persons with such access.