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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2271:

  A company pays a dividend of $6 per share to the holders of its perpetual preferred stock. The firm's bonds are currently yielding 8% per year and the firm's preferred stock are selling to yield 100 basis points below the firm's bond yield. What is the value of the preferred stock?

  A. $8.64
  B. $75. 45
  C. $85. 71
  D. Not able to compute with the above data.
  C. $85. 71

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  Explanation

  Value = dividend/discount rate = 6/0.07= $85. 71. The discount rate on the preferred stock is below that of the bonds.

• Question 2272:

  A preferred stock has a dividend payout of $5 every 6 months. Your required rate of return is 20% annually. What is the value of the preferred stock?

  A. $99
  B. none of these answers
  C. $75
  D. $50
  D. $50

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  Explanation

  First recognize that the appropriate discount rate to use is half of 20% or 10% because the dividend is paid out twice a year. Next calculate the value of the stock as Dividend/Required rate or $5/0.1 = $50.

• Question 2273:

  For accounting purposes, which of the following is/are TRUE about assets?

  I. Assets are future benefits whose values are known today.

  II. Assets are generated by past transactions or events.

  III. Assets include the value of residual ownership of the firm.

  IV.

  Assets are best viewed as sources of future cash flows.

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

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  Explanation

  Assets are defined as "probable future benefits obtained or controlled by a particular entity as a result of past transactions or events." III refers to "Equity" while IV is not correct since the benefits need not be solely in the form of cash.

• Question 2274:

  Firm A currently shows assets worth 2,000 and equity of 1,500. During the year, it capitalized interest expense worth 200, of which 50 was depreciated/amortized. The firm faces a tax rate of 50%. If the firm had expensed the interest paid, which of the following would be true?

  A. Its assets would be stated at 1,750.
  B. Its assets would be stated at 1,850.
  C. Its assets would be stated at 2,000.
  D. Its assets would be stated at 1,800.
  B. Its assets would be stated at 1,850.

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  Explanation

  If the firm's assets without capitalization equal A, then we have A+200-50 = 2,000. Hence, A = 1,850.

• Question 2275:

  The specific estimate approach to estimating an earnings multiplier involves

  A. inferring the direction of change in the multiplier based on derivations of specific estimates for its three major components.
  B. inferring the direction of change in the multiplier based on predictions for change in its ten major components.
  C. inferring the direction of change in the multiplier based on predictions for changes in its three major components.
  D. inferring the direction of change in the multiplier based on derivations of the specific estimates for its ten major components.
  A. inferring the direction of change in the multiplier based on derivations of specific estimates for its three major components.

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  Explanation

  The specific estimate approach derives a specific estimate for the earnings multiplier based on a range of estimates of the dividend payout ratio, the required rate of return, and the growth rate in earnings and dividends.

• Question 2276:

  Based on the P/E equation, there is ________ relationship between the payout ratio and the P/E ratio.

  A. no
  B. a negative
  C. a positive
  C. a positive

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  Explanation

  P/E ratio = (Payout ratio)/(k - g); i.e. the relationship is positive.

• Question 2277:

  During the past six months, the purchasing agent bought:

  Tons of Coal 1,200 3,000 500 Price Per Ton $28.50 $87. 25 $88.00

  What is the weighted mean price per ton?

  A. $89.18
  B. $68.47
  C. None of these answers
  D. $87. 25
  E. $72. 33
  E. $72. 33

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  Explanation

  (1200*28.5)+(3000*87. 25)+(500*88) = 339950. Mean = 339950/4700 = 72. 33

• Question 2278:

  Which of the following would not be an expected impact of a debt pay down program?

  A. a decrease in aggregate demand
  B. a shift to the left in the aggregate supply curve
  C. an increase in unemployment
  D. a decrease in the price level
  E. falling interest rates
  B. a shift to the left in the aggregate supply curve

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  Explanation

  Theoretically, fiscal policy should cause a shift in the aggregate demand curve, which will cause movement along the supply curve. Debt pay down implies that net government spending (spending less taxes) is negative, and therefore the demand curve has shifted to the left, while the supply curve has not moved.

• Question 2279:

  In the basic Keynesian model of national income determination, aggregate expenditures refer to

  A. the amount of demand for consumer goods that would arise if all citizens had all the income they wanted.
  B. the combined expenditures of consumers and businesses minus government spending.
  C. spending for consumption, investment and exports less imports plus government purchases of goods and services.
  D. consumer spending measured in constant prices.
  E. the amount of GDP that could be produced if unemployment were zero.
  C. spending for consumption, investment and exports less imports plus government purchases of goods and services.

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  Explanation

  Aggregate expenditures are the sum of planned consumption, investment, government expenditures and net exports.

• Question 2280:

  A stock's return is normally distributed with a mean of 16% and a standard deviation of 8%. The probability that an investment in the stock will result in a loss in one year is approximately:

  A. 5%
  B. 2. 5%
  C. cannot be calculated
  D. 10%
  B. 2. 5%

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  Explanation

  Note that the mean is 2 standard deviations above zero. The probability that the stock's return will lie outside the 2-sigma range around the mean equals 5% for a standard normal distribution. This implies that the stock return will be either less than 0% or more than 32% with a 5% probability. Since the normal distribution is symmetrical about the mean, the probability that the stock return will be less than zero equals 5/2 = 2. 5%. Instead of the above, you could also solve the problem using the z-score and the normal probability distribution table. You should, however, be aware of short-cuts like the above.