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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2261:

  Which of the following statements regarding hypothesis testing is false?

  A. If the population standard deviation is known, then the standard deviation of the sample is found by dividing the population standard deviation by the square root of "n."
  B. The test statistic is also known as the "critical value."
  C. A Type II error is defined as the act of incorrectly failing to reject the null hypothesis.
  D. The level of significance is denoted by the Greek letter alpha.
  E. Despite the different ways to formulate a hypothesis, the null hypothesis is always tested at the point of equality.
  F. More than one of these answers is incorrect.
  B. The test statistic is also known as the "critical value."

  ---

  Explanation

  The test statistic is measured AGAINST the critical value. The test statistic is defined as "...a quantity, calculated on the basis of sample, whose value is the basis for deciding whether to reject or not reject the null hypothesis." The critical

  value is found by referencing the probability distribution for the series (z-distribution, t-distribution, Chi-squared distribution, F-distribution, etc.).

  The remaining answers are correct.

• Question 2262:

  The probability that a value from a normal distribution will be less than 4 equals 83%. If the distribution has a mean of 2. 2, the standard deviation of the distribution must be:

  A. 2. 21
  B. 0.96
  C. 1.89
  D. 3. 77
  C. 1.89

  ---

  Explanation

  Using the Normal probability tables, the z-value of the observation, X, which can be exceeded with a probability of 17% equals 0.955. We are given that X = 4. Now, the z-value of a selected observation, X, from a normal distribution with mean M and standard deviation S equals z = (X-M)/S. Therefore, 0.955 = (4 - 2. 2)/S. This gives S = 1.885.

• Question 2263:

  Which of the following is categorized under speculative property and not income property?

  A. Land
  B. Office buildings
  C. Factories
  D. Single family properties
  E. Multi-family properties
  F. Warehouses
  A. Land

  ---

  Explanation

  Income property includes single and multi-family properties, office buildings, factories, and warehouses. Speculative property includes raw land.

• Question 2264:

  A preferred stock has a $500 par value and a dividend payout of $45 per year. Your required rate of return is 15%. What is the value of the preferred stock?

  A. not enough information to calculate it
  B. $400
  C. $350
  D. $300
  D. $300

  ---

  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 = $45/.15 = $300

• Question 2265:

  When an analyst reaches conclusions about a firm's impending announcements before the actual release of information, using non-material, non-public information in conjunction with public information, insider trading charges cannot be leveled against her. This arises from a legal defense against insider trading charges known as:

  A. the Shingles Theory.
  B. the question is based on false premise. The analyst can be held responsible for insider trading if she uses any inside information in her conclusions.
  C. the Insider Legal Statute.
  D. the Mosaic Theory.
  D. the Mosaic Theory.

  ---

  Explanation

  Insider trading charges arise only when the inside information used is material and non-public. Analysts who use non-material inside information in conjunction with publicly available data to draw conclusions which happen to be the same as those that would be derived given material inside information are shielded from insider trading charges under the "Mosaic Theory." The logic behind the defense is that investment analysts are exposed to a wide variety of public information (i.e., a "mosaic of information") and already have a good idea about what the information means. Further, the inside information, when non-material, cannot (by definition) have been the primary shaper of the final conclusions. Hence, the possession of the inside information makes only marginal contribution to the conclusions and as such, should not trigger insider trading violations.

• Question 2266:

  Arbliss, an AIMR member, has been working for a financial software company, Supersoft Corp. for the past 3 years. He now wants to leave the firm and start his own software proprietorship. Which of the following will not constitute a violation of the AIMR code?

  I. Making arrangements to set up the proprietorship prior to leaving current employment, without Supersoft knowing about it.

  II. Soliciting Supersoft's clients prior to the termination of employment.

  III.

  Using a confidential software error-checking program he had developed for Supersoft for his own purposes.

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

  ---

  Explanation

  Standard III (B) - Duty to Employer - does not preclude a member from entering into independent practice while still employed. It does require the employee to obtain written permission from the employer as well as the outside entity before doing this. It does not prohibit a departing employee from making arrangements to enter independent practice prior to leaving current employment, as long as such preparations do not constitute a breach of loyalty toward the employer. Activities that can be a breach of loyalty include misappropriation of trade secrets, misuse of confidential information, solicitation of the firm's clients before the termination of unemployment and in general, any activity that would destabilize the firm's operations.

• Question 2267:

  Assume that all the assumptions of Modigliani and Miller hold. In particular, there are no taxes and transaction costs. A firm has a policy of paying out 5% of the stock price as dividends. However, an investor would like to receive a 7% dividend. For this, he should:

  A. liquidate 7% of his stock holding after receiving the dividend.
  B. liquidate 2% of his stock holding after receiving the dividend.
  C. use the dividend to buy 2% of the stock after receiving the dividend.
  D. none of these answers.
  D. none of these answers.

  ---

  Explanation

  Suppose the investor is holding stocks worth $100. The company then pays $5 as dividends. When the dividend is paid out, the stock price falls to $95 (in the absence of tax effects, as assumed). To increase his income to $7, the investor must sell off stocks worth $2. This corresponds to 2/95 = 2. 105% of the post dividend stock holding.

• Question 2268:

  Which of the following are operating cash flows?

  I. Interest received

  II. Interest paid

  III. Dividends received

  IV.

  Dividends paid

  A. I, II, III and IV
  B. I, II and IV
  C. I and III
  D. I, II and III
  D. I, II and III

  ---

  Explanation

  It is very important to remember the following points about dividends and interests:

  1. Dividends received from stock investments are considered operating cash flows.

  2. Dividends paid on equity are considered financing cash flows.

  3. Interest payments on debt are considered operating cash flows.

  4. Interest received from debt investments are considered operating cash flows.

• Question 2269:

  International Transport Company is considering building a new facility in Seattle. If the company goes ahead with the project, it will spend $2 million immediately (at t = 0) and another $2 million at the end of Year 1 (t = 1). It will then receive net cash flows of $1 million at the end of Years 2 - 5, and it expects to sell the property for $2 million at the end of Year 6. The company's cost of capital is 12 percent, and it uses the modified IRR criterion for capital budgeting decisions. Which of the following statements is most correct?

  A. The regular IRR is less than the cost of capital. Under this condition, the modified IRR will also be less than the regular IRR.
  B. The project should be accepted because the modified IRR is greater than the cost of capital.
  C. If the regular IRR is less than the cost of capital, then the modified IRR will be greater than the regular IRR. That situation applies in this case.
  D. The project should be rejected because the modified IRR is less than the regular IRR.
  E. Given the data in the problem, the modified IRR criterion indicates that the project should be accepted. However, the NPV is negative. This demonstrates that the modified IRR criterion is not always a valid decision method for projects such as this one.
  C. If the regular IRR is less than the cost of capital, then the modified IRR will be greater than the regular IRR. That situation applies in this case.

  ---

  Explanation

  PV(Outflows) = -$2,000,000 - $2,000,000/1.12 = -$3,785,714.

  TV(Inflows) = $1,000,000(FVIFA(12%,4))(1.12) + $2,000,000

  = $1,000,000(4. 7793)(1.12) + $2,000,000 = $7,352,816.

  1 + MIRR = [7,352,816/3,785,714]^1/6; MIRR = 11.7%.

  Since the MIRR is less than the cost of capital, the IRR is less than the MIRR.

• Question 2270:

  A firm has preferred equity outstanding but has not declared payment of dividend on it. If the firm's net income is 1000 and there are 100 common shares outstanding, the firm's Basic EPS is ________.

  A. equal to 10
  B. insufficient information
  C. less than 10
  D. more than 10
  C. less than 10

  ---

  Explanation

  Even when preferred dividends have not been declared, they must be subtracted from net income while calculating Basic EPS since no dividends can be paid on common share unless the preferred dividends are paid. Basic EPS includes only the amount that is available for distribution on common shares.