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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2371:

  Firmica recently bought a fleet of trucks which fall in the 5-year MACRS class for $135,000, with an additional $10,000 for shipping, minor taxes and paperwork. The trucks are expected to last for 7 years and have a total salvage value of $25,620. The recovery allowance for year 1 in the 5-year MACRS class is 20% and in the second year, it is 32%. In the second year, the depreciation expense arising from the fleet equals ________.

  A. $46,400
  B. $34,560
  C. $43,200
  D. $37,120
  A. $46,400

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  Explanation

  You should remember four things about MACRS:

  1. Salvage value is never considered in calculating the depreciable basis.

  2. The depreciable basis equals the purchase price plus all shipping and installation costs. 3. The depreciable basis does not change over the life of the asset in question.

  4. Depreciation expense for any given year equals the allowed recovery percentage in that MACRS class times the depreciable basis. Therefore, in this case, the depreciable basis equals $135,000 + $10,000 = $145,000 and the year 2 depreciation equals $145,000*32% = $46,400.

• Question 2372:

  The Residual Dividend Model is characterized as which of the following?

  A. Dividend paid = EBIT (1 - combined state/federal tax rate) - preferred dividends - interest expense
  B. Dividend paid = EBIT - Interest expense (1 - combined state/federal tax rate)
  C. Dividend paid = EBIT - capital expenditures
  D. None of these answers
  E. Dividend paid = EBITA - proposed capital expenditures - interest expense
  F. Dividend paid = EBIT - Retained earnings which are necessary to maintain the firm's optimal capital budget
  E. Dividend paid = EBITA - proposed capital expenditures - interest expense

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  Explanation

  The Residual Dividend Model is characterized by a firm paying out all earnings to common stockholders beyond that which is necessary to maintain the firm's optimal capital budget. Answer C correctly illustrates the calculation of the dividend paid according to the Residual Dividend Model.

• Question 2373:

  Dayon Grimley has been working as a Tech Sector analyst with an advisory firm for the past 3 years. Recently, he read an analytical report by Sam Swetson about the trends and research developments in the computer chips industry. The report was an in-depth analysis of how the industry had developed, where it seemed to be headed and what impact the developments could have on the growth of the entire industry. In a footnote, Sam had speculated about a secret, ultrafast chip rumored to be under development by Chipcorn, Inc. Dayon decided to pursue this line of research and called up a highly placed official at Chipcorn. While the official did not confirm or deny the existence of the ultra-fast chip, he did reveal enough for Dayon to conclude that the development was, in fact, in the final stages and the chip could be out in the market in as little as 3 months. He quickly modified Sam's report, with a separate section on the super-chip and recommended that his clients increase the weighting on tech stocks by 20%. The report made no mention about his interview with Chipcorn official nor Sam Swetson's report. Dayon has:

  I. violated Standard II (C) - Prohibition against Plagiarism.

  II. violated Standard II (B) - Professional Misconduct.

  III. violated Standard IV (A.1) - Reasonable Basis and Representations.

  IV.

  violated Standard V (A) - Prohibition against Use of Material Nonpublic Information.

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

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  Explanation

  By not properly acknowledging Sam's report, Dayon violated Standard II (C) - Prohibition against Plagiarism. Also, since the information about the super-chip was non-public and obviously material, Dayon violated Standard V (A) - Prohibition against Use of Material Nonpublic Information.

• Question 2374:

  The accumulated depreciation account should show:

  A. total depreciation for fixed assets since the business was formed
  B. only the depreciation expense recognized during the current year
  C. total depreciation for fixed assets still in use
  D. current depreciation expense plus estimated depreciation for next year
  C. total depreciation for fixed assets still in use

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  Explanation

  Depreciation recognized and accumulated on fixed assets still on the books is reflected in the Accumulated Depreciation account(s).

• Question 2375:

  If 68% of the observations of a bell-shaped, symmetrical frequency distribution fall between -20 and + 60, the mean and the standard deviation of the distribution are:

  A. 40, 20
  B. 40, 40
  C. 20, 20
  D. 20, 40
  D. 20, 40

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  Explanation

  Since the distribution is symmetrical about the mean, the mean is equal to (-20 + 60)/2 = 20. According to the empirical/Normal rule, for a bell-shaped, symmetrical frequency distribution, 68% of the observations lie within one standard deviation of the mean. Therefore, the standard deviation equals 60-20 = 40.

• Question 2376:

  The exact estimate of future dividends depends on the outlook for ________ and the firm's ________.

  A. earnings; sales
  B. earnings growth; dividend policy
  C. stock price; dividend policy
  D. sales price; earnings
  B. earnings growth; dividend policy

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  Explanation

  The exact estimate of future dividends depends on the outlook for earnings growth and the firm's dividend policy.

• Question 2377:

  If all the plots on a scatter diagram lie on a straight line, what is the standard error of estimate?

  A. Infinity
  B. None of these answers
  D. +1
  E. -1
  C

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  Explanation

  The standard error of estimate basically measures the difference between the points and the straight line.

• Question 2378:

  Which of the following is/are required by AIMR-PPS with regards to creation and maintenance of composites?

  I. All actual fee-paying discretionary portfolios must be segregated into one or more composites based on similar investment strategies.

  II. Portfolios must not be switched from one composite to another unless documented changes in client guidelines make the switching appropriate.

  III.

  Composites must include all terminated portfolios while calculating performance for periods prior to the termination.

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

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  Explanation

  All actual fee-paying discretionary portfolios must be included in at least one composite based on similar investment strategy. Segregation of these accounts is not required. (II) and (III) are true.

• Question 2379:

  How much must you deposit today in order to withdraw $500 in 1 year, $700 in 3 years and $500 in 4 years, assuming your money earns 6. 5% per year, compounded annually?

  A. $1,200.00
  B. $1,503. 27
  C. $1,240.80
  D. $1,421.95
  E. $1,437. 64
  E. $1,437. 64

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  Explanation

  Solve this question by working 3 compound interest problems. On the BAII Plus, press 1 N, 6. 5 I/Y, 0 PMT, 500 FV, CPT PV, which yields $469.48. Then press STO 1. Then press 3 N, 700 FV, CPT PV, which yields $579.49. Then press + RCL 1 = STO 1. Then press 4 N, 500 FV, CPT PV, which yields $388.66. Then press + RCL 1 = to see the answer. On the HP12C, press 1 n, 6. 5 i, 0 PMT, 500 FV, PV. Then press STO 1. Then press 3 N, 700 FV, PV. Then press RCL 1 + STO 1. Then press 4 n, 500 FV, PV. Then press RCL 1 + to see the answer. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the P/Y value set to 1.

• Question 2380:

  Ted McGovern works in the economics branch of a government bank regulator. When he arrives at work this morning and checks his voicemail, he has a message from the Regional Director asking him to calculate the expected rate of return

  for a stock market series. More detailed information will be forthcoming in an e-mail. Fortunately, McGovern still has his CFA Program study guides in his office and finds the correct formulas. McGovern logs on to the computer network and

  downloads an attachment that contains the following estimates:

  Overall Assumptions:

  Index Estimates ?Bull Market:

  Index Estimates ?Bear Market:

  The expected return on the index is closest to:

  A. 67. 4%.
  B. 39.4%.
  C. 30.8%.
  D. 98.2%.
  C. 30.8%.

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  Explanation

  To calculate the expected index return, we need to calculate the expected return for the bull market and the expected return for the bear market. Then, we will use the given probabilities of each scenario to calculate the expected index return.

  Note: All amounts are in millions of $ unless noted otherwise.

  BULL MARKET

  BEAR MARKET

  EXPECTED VALUE OF INDEX

  = 0.35 * 110% + 0.65 * -11.8% =30.83%