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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2241:

  When the FIFO method is used, ending inventory units are priced at the

  A. most recent price
  B. the average price
  C. earliest price
  D. none of these answers is correct
  A. most recent price

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  Explanation

  The first-in-first-out (FIFO) method is based on the assumption that the costs of the first items acquired should be assigned to the first items sold, therefore ending inventory on hand is based on the most recent prices.

• Question 2242:

  Scott Corporation's new project calls for an investment of $10,000. It has an estimated life of 10 years. The IRR has been calculated to be 15 percent. If cash flows are evenly distributed and the tax rate is 40 percent, what is the annual before-tax cash flow each year? (Assume depreciation is a negligible amount.)

  A. $1,500
  B. $3,321
  C. $5,019
  D. $1,993
  E. $4,983
  B. $3,321

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  Explanation

  X = after-tax cash flow.

  Y = before-tax cash flow.

  X = Y(1 - T).

  $10,000 = X(PVIFA(15%,10))

  $10,000 = X(5. 0188)

  X = $1,992. 51. $1,992. 51 = Y(1 - 0.40)

  Y = $3,320.85 = $3,321.

• Question 2243:

  Which of the following represents a "contrary opinion" technical indicator?

  A. The Diffusion Index.
  B. Investment advisor opinions.
  C. T-Bill-Eurodollar spread.
  D. The Confidence Index.
  E. Short sales by specialists.
  F. More than one of these answers is correct.
  B. Investment advisor opinions.

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  Explanation

  Of the choices listed, only "investment advisor opinions" represents a contrary opinion technical indicator. Technical analysts often believe that the majority of market participants are incorrect in their opinions about market direction and valuation, especially preceding market peaks and troughs. This style of thinking is often referred to as "contrary opinion" technical analysis.

  Contrarian technical analysts often examine the opinions of market participants, including investment advisors and futures speculators, for insight into the overall sentiment of securities professionals.

  Believing these individuals to be inaccurate in their forecasts, contrary opinion technical analysts assume the contra-side opinion. So said, a high degree of bullishness amongst investment advisors is viewed as bearish by contrary opinion technical analysts. Conversely, a high degree of bearishness amongst investment advisors is viewed as a bullish signal by contrary opinion technical analysts.

  The Confidence Index is a measure of yield spreads between high-grade corporate bonds and the yields on average corporate bonds. The Diffusion Index measures the breadth of the market, and is found by taking the total volume of advancing shares plus one-half of the issues unchanged, divided by the total number of issues traded.

• Question 2244:

  Standard IV (B.4) deals with ________.

  A. Disclosure of Conflicts to Clients and Prospects
  B. Prohibition against Misrepresentation
  C. None of these answers
  D. Disclosure of Referral Fees
  E. Priority of Transactions
  F. Prohibition against Use of Material Nonpublic Information
  G. Preservation of Confidentiality
  H. Performance Presentation
  E. Priority of Transactions

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  Explanation

  Standard IV (B.4) deals with the priority of transactions of clients and employers over transactions in investments in which the member is the beneficial owner.

• Question 2245:

  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 estimated annual dividend at t1 = $2. 30

  The estimated EPS at t1 = $4. 85

  The anticipated growth rate of dividends is 10%

  The anticipated growth rate of earnings is 9%

  The required rate of return is 14%

  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. 9.48
  C. 13. 04
  D. 10.51
  E. 13. 14
  F. None of these answers is correct.
  F. 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:

  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 = thedividend 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 2246:

  Which of the following conditions would allow a firm to classify a short-term liability as a long-term debt?

  I. The firm has issued a long-term note with the stated purpose of extinguishing the short-term debt when it matures. The note is cancelable if there are violations of certain operating provisions.

  II. The firm has entered into a binding agreement with a bank to refinance the short-term debt with a long-term liability.

  III.

  The firm has announced that it will continue to refinance the debt with available credit for the next 2 years.

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

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  Explanation

  If these agreements have any provisions for cancellation which are either ambiguous or which have a good probability of being violated, then the short-term debt cannot be classified as a long-term debt. That's why (I) is not a valid choice. (III) is not acceptable since there is no demonstration of credible intent or ability to be able to refinance the debt.

• Question 2247:

  Consider the following information:

  30 day T-Bill rate (Risk free rate) 7. 2%

  Common Stock Beta 0.8

  Expected Rate of return for the market 15. 0%

  Net Worth to Total Asset Multiple .25

  Calculate this firm's cost of retained earnings using the CAPM approach.

  A. 7. 2%
  B. 13. 44%
  C. 12. 0%
  D. 9.6%
  E. 22. 2%
  F. 10.2%
  B. 13. 44%

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  Explanation

  To calculate the cost of retained earnings for a firm using CAPM, one may use the following formula: Cost of retained earnings = risk free rate + ((expected rate of return on the market - risk free rate) x Beta). In this case the cost of retained earnings = 7. 2% + ((15. 0% - 7. 2%) x 0.8 = 13. 44%.

• Question 2248:

  When studying industry analysis, which would be of most importance when concentrating on financial performance?

  A. all of these would be important
  B. financial leverage
  C. components of return on equity
  D. return on total capital
  E. return on foreign investments
  A. all of these would be important

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  Explanation

  These are all factors in financial performance when studying industry analysis.

• Question 2249:

  Sharleef Nettleton, a quantitative analyst with Churn Brothers Brokerage, is examining a data sample and has amassed the following information: Standard deviation of the sample: 2. 90 Number of observations: 68 Degrees of freedom: 2 Sample mean: 114 Assume that Ms. Nettleton formulates a null hypothesis that states that the value of the population mean is zero. Additionally, assume that the population standard deviation is unknown. Given this information, what is the standard error of the estimate? Further, what is the test statistic? Choose the best answer.

  A. 1.0199; 111.78
  B. 0.3517; 84. 34
  C. 1.0199; 56. 44
  D. 0.3517; 324. 14
  E. None of these answers is correct.
  F. 0.3570; 29.91
  G. 0.3570; 319.38
  D. 0.3517; 324. 14

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  Explanation

  If the population standard deviation is unknown, as in this example, the standard error of the estimate is found by using the following equation:

  {Standard error = s / square root of n} where s = the sample standard deviation and n = the number of observations in the sample.

  In this example, all of the necessary information has been provided, and the determination of the standard error of the estimate is found as:

  {Standard error = [2. 90 / 8.2462] = 0.3517}

  Now that the standard error of the estimate has been calculated, the test statistic can be found by using the following equation:

  {Test statistic = [sample statistic - value of the population parameter under the null hypothesis] / standard error of the sample statistic].

  Again, all of the necessary information has been provided, and the calculation of the test statistic is found as follows:

  {Test statistic = [114 - 0] / 0.3517 = 324. 14}

  This is a very large test statistic and the null hypothesis will likely be rejected unless a very low level of confidence is employed.

• Question 2250:

  The stock of a zero growth firm has a beta of 1.3 at a time when the market premium equals 7. 7% and the risk-free rate equals 5%. The firm's earnings multiplier ratio equals ________.

  A. 7. 19
  B. information about earnings and dividends is missing
  C. 6. 66
  D. 4. 32
  C. 6. 66

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  Explanation

  According to the Dividend Discount Model, P/E = payout ratio/(k-g) in standard notation. A no growth firm has a retention ratio of zero and a payout ratio of 1. Further, g = 0 for no growth. Therefore, the P/Eratio of a no-growth firm is simply equal to the reciprocal of its required rate of return. the firm's CAPM required rate = 5% + 1.3 * 7. 7% = 15%. The earnings multiplier is therefore equal to 1/0.15 = 6. 66.