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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2291:

  Which of the following is/are true about aggregate demand?

  I. An increase in the real rates of interest increases current demand.

  II. An increased optimism about the future direction of the economy will increase current demand.

  III.

  An increase in the expected future inflation rate increases current demand.

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

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  Explanation

  An increase in real interest rates makes current consumption more expensive in terms of opportunity cost. Hence, when real rates rise, current demand falls. On the other hand, if future inflation is expected to be high, then consumers want to buy goods in the current period, raising aggregate demand. Similarly, if they expect the future to be prosperous, they will spend some of that expected future income on current consumption. Hence, both higher expected future inflation and future wealth will increase current demand.

• Question 2292:

  Standard IV (A.3) relates to two major components, Independence and Objectivity. Under this Standard, modest gifts that do not exceed ________ and entertainment are acceptable, without disclosure.

  A. $100
  B. one-twentieth of your annual salary and bonus
  C. one-tenth of your annual salary and bonus
  D. $500
  E. none of these answers
  F. $1,000
  A. $100

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  Explanation

  External sources may try to influence the investment process by offering analysts and portfolio managers a variety of "perks." The perks may include gifts, invitations to lavish functions, tickets and so on. Modest gifts that do not exceed $100 and entertainment are acceptable, but special care should be taken by member analysts and investment managers to resist subtle and not-so-subtle pressures to act in a manner possibly detrimental to their clients.

• Question 2293:

  Your company has decided that its capital budget during the coming year will be $20 million. Its optimal capital structure is 60 percent equity and 40 percent debt. Its earnings before interest and taxes (EBIT) are projected to be $34. 667 million for the year. The company has $200 million of assets; its average interest rate on outstanding debt is 10 percent; and its tax rate is 40 percent. If the company follows the residual dividend policy and maintains the same capital structure, what will its dividend payout ratio be?

  A. 35%
  B. 30%
  C. 15%
  D. 20%
  E. 25%
  E. 25%

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  Explanation

  Capital budget = $20 million.

  Optimal capital structure: 60% equity, 40% debt.

  EBIT = $34. 667 million.

  Assets = $200 million.

  k(d) = 10%; T = 40%. Dividend Payout = ?

  Debt = 0.40($200 million) = $80 million.

  Interest = 0.10($80 million) = $8 million.

  EBIT$34. 667

  -INT8.000

  EBT$26. 667

  Taxes (40%)10.667

  NI$16. 000

  Equity needed = 0.60($20 million) = $12 million.

  Net Income$16

  -Equity needed12

  Amount left for dividend$4

  Dividend Payout = $4/$16 = 25%.

• Question 2294:

  Which of the following would be reported as an extraordinary item?

  A. uninsured loss from a flood
  B. gain or loss from passing of a new law
  C. all of these answers are correct
  D. gain or loss from early retirement of debt
  C. all of these answers are correct

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  Explanation

  An item must be both unusual and infrequent (and material in amount) to be classified as extraordinary.

• Question 2295:

  What is a Type II error?

  A. Rejecting a false alternative hypothesis
  B. Accepting a false null hypothesis
  C. None of these answers
  D. Accepting a false alternative hypothesis
  E. Rejecting a false null hypothesis
  B. Accepting a false null hypothesis

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  Explanation

  The type II error is accepting the null hypothesis when it is actually false.

• Question 2296:

  Melissa Hart, a quantitative analyst with the Kansas City Federal Reserve, has been involved with accumulating data for an essay regarding economic conditions in her area. Specifically, Melissa has been gathering data related to the levels of consumer debt in the state of Missouri. The following is a description of the data: Sample mean: $3,451.00 Standard deviation of the sample: $819 Number of observations: 441 Assume that Ms. Hart formulates a hypothesis test in which the null hypothesis specifies that the population mean is equal to $4,600. 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. The answer cannot be determined from the information provided.
  B. $39.09; 1.17
  C. $1.86; (617. 74)
  D. $39.00; 0.52
  E. $39.00; (29.46)
  F. $1.86; 862. 00
  G. $39.09; (29.39)
  E. $39.00; (29.46)

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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 = [$819 / 21] = $39}

  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 = [$3,451 - $4,600] / $39 = (29.46)}

  This is a rather large test statistic, and will likely result in the rejection of the null hypothesis unless a very low level of confidence is employed.

• Question 2297:

  Which of the following AIMR standards states that a member shall not knowingly participate, or assist, in any violation of applicable laws, regulations, or the Code and Standards?

  A. III
  B. VI
  C. V
  D. I
  D. I

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  Explanation

  Standard I: Fundamental Responsibilities states: "Members shall: A. Maintain knowledge of and comply with all applicable laws, rules and regulations of any government, governmental agency, regulatory organization, licensing agency, or professional association governing the members' professional activities, and B. Not knowingly participate or assist in any violation of such laws, rules, or regulations."

• Question 2298:

  Joe Wellworth, an oil analyst with Smith, Kleen and Beetchnutty institutional brokerage, is trying to determine an appropriate earnings multiplier for the natural gas industry. In his research, Mr. Wellworth has examined the relationship between the earnings multiplier of the natural gas industry and the Price-to-Earnings ratio of the Standard and Poors 500. Using a time series analysis, Joe examines the trend in the relationship between the natural gas industry and the overall market and uses this information to estimate the appropriate earnings multiplier for the natural gas industry.

  Which of the following best characterizes this method of estimating the earnings multiplier of an industry? Choose the best answer.

  A. Correlation analysis
  B. Microanalysis
  C. The bottom-up approach
  D. Time series analysis
  E. Macroanalysis
  E. Macroanalysis

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  Explanation

  The answer called for in this example is macroanalysis. This method involves an examination of the relationship between the earnings multiplier of a stock market series and the earnings multiplier of the overall market. For example, an individual projecting an earnings multiplier for a software index using macroanalysis would begin by examining the relationship between the P/E ratio of the software index and the P/E ratio of a broad market index such as the Standard and Poors 500. Both historical trends and point estimates would be examined, and from this information, a projection of the earnings multiplier for the stock market series is deduced. This is precisely the process illustrated in this example.

  This is contrasted by microanalysis, which involves an examination of the components of the earnings multiplier, including the anticipated growth rate of dividends, the required rate of return, and the dividend payout ratio. Once these variables have been examined, both from the perspective of trend analysis and point estimation, a value for the earnings multiplier is deduced.

  The bottom-up approach is used in the investment selection process, and involves identifying superior investments by first examining companies, rather than beginning with an examination of macroeconomic cycles and influence. Time series analysis, while materially correct, does not represent the best possible answer. L1 SS 13

• Question 2299:

  A technical analyst with Smith, Kleen and Beetchnutty is examining the automobile parts industry to determine whether its current earnings multiple is justified. In his analysis, this technical analyst examines the underlying components of the earnings multiplier, the dividend payout ratio, the required rate of return, and the expected growth rate, and the relationship between the values of these components for the automobile parts industry and the overall market. Which of the following best characterizes this method of estimating an earnings multiplier for an industry? Choose the best answer.

  A. Porter method
  B. Microanalysis
  C. Macroanalysis
  D. Sensitivity analysis
  E. Simulation analysis
  F. None of these
  B. Microanalysis

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  Explanation

  The method profiled in this example is "microanalysis," which is one of two methods for estimating the earnings multiplier of an industry. Microanalysis involves examining the variables underlying theearnings multiplier - the required rate of return, the growth forecast, and the dividend payout ratio. In microanalysis, these variables are examined for the industry and then compare them with the values of these variables for the entire market.

  The microanalysis method is contrasted by the macroanalysis method, which involves examining the historical relationship between the earnings multiplier of an industry with that of the overall market. Macroanalysis forecasts often use a time series.

  When examining and forecasting an industry earnings multiplier, it is recommended that both macroanalysis and microanalysis be used. This should produce a more reliable answer. "Simulation analysis," and "scenario analysis," are methods of measuring stand-alone risk, and the "Porter Method" is used to measure industry competition.

• Question 2300:

  A market researcher with Churn Brothers Brokerage is attempting to estimate the earnings per share (EPS) for a pharmaceutical index, and has gathered the following information:

  Sales per share: $200 Next year's operating profit margin: 30% Next year's depreciation per share: $18 Next year's interest expense: $13 Next year's corporate tax rate: 35%

  Using this information, what is the EPS figure for this stock market series?

  A. $17. 75
  B. None of these answers is correct.
  C. $30.55
  D. $36. 85
  E. $18.85
  F. The answer cannot be calculated from the information provided.
  E. $18.85

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  Explanation

  The estimation of EPS for a stock market series involves five steps. Specifically, to determine an estimate of EPS for a stock market series, it is necessary to:

  Estimate the sales per share

  Estimate next year's operating profit (EBIDT), or operating profit margin Estimate next year's depreciation per share

  Estimate next year's interest expense per share

  Estimate next year's corporate tax rate

  Once estimates for these components have been determined, they are put into the following equation:

  EPS for a stock market series = {[(Sales per share * operating profit margin) - depreciation per share - interest expense per share] * (1 - corporate tax rate).

  Imputing the given information into this equation will yield the following:

  EPS for a stock market series = {[($200 * 0.30) - $18 - $13] * (1 - 0.35)} = $18.85

  If you chose $36. 85, remember that the depreciation figure is not added back to the EPS calculation. What we are looking at is an operating earnings after tax figure, not a cash-based figure.