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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2381:

  What are half of the observations always greater than?

  A. Median
  B. Geometric mean
  C. None of these answers
  D. Mode
  E. Mean
  A. Median

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  Explanation

  By definition, the median is the middle point. It divides the observations into two. The mean is NOT the answer because it may be affected by extreme values.

• Question 2382:

  Minority interest on the consolidated balance sheet is listed ________.

  A. none of these answers
  B. as a liability
  C. between liabilities and shareholders' equity
  D. as a component of shareholders' equity
  E. as an asset
  C. between liabilities and shareholders' equity

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  Explanation

  Minority interest represents the proportionate stake of minority shareholders in a company's majority- owned subsidiary that is consolidated. Minority interest is neither a liability nor equity but it is a financing component and, therefore, is presented between liabilities and shareholders' equity.

• Question 2383:

  In a period of rising prices, the inventory method that gives the lowest possible value for ending inventory is:

  A. gross profit
  B. LIFO
  C. FIFO
  D. weighted average
  B. LIFO

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  Explanation

  The ending inventory under LIFO is priced at the earliest, and thus the lowest prices (in a period of rising prices) than any of the other methods.

• Question 2384:

  Given that the retention rate of earnings of a firm is 0.30, the required rate of return on its stock is 17%, the expected growth rate is 12%, and expected 12 month earnings per share are $2. 32, what should the current market price of the stock be?

  A. $43. 00
  B. Not enough information
  C. $32. 48
  D. $39.18
  E. $29.66
  F. $14. 12
  C. $32. 48

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  Explanation

  According to the earnings multiplier model, the price/earnings ratio is equal to the dividend payout ratio divided by the spread between the required rate of return and the expected growth rate. The dividend payout ratio is equal to 1 - the retention rate of earnings (everything the firm does not retain is paid out in dividends). In this question, it is 1 - 0.30 = 0.70. The P/E ratio is thus equal to 0.70 / (0.17 - 0.12) = 14. Multiplying the P/E ratio by earnings per share yields the current market price. In this question, it is 14 x

  2. 32 = $32. 48.

• Question 2385:

  Which of the following statements is false?

  A. real GDP excludes earnings by domestic citizens abroad
  B. the change in real GDP plus the inflation rate equals growth in nominal GDP
  C. changes in nominal GDP include the impact of changes in the money supply
  D. real GDP measures strictly changes in national output
  E. change in nominal GDP is always greater than the change in real GDP
  E. change in nominal GDP is always greater than the change in real GDP

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  Explanation

  The change in nominal GDP usually exceeds that of real GDP because inflation is usually positive. However, in a flat or declining price environment real GDP would exceed nominal GDP change.

• Question 2386:

  When taking on a new affiliation while working for his present employer, a member should:

  A. notify his employer in writing and obtain written consent.
  B. notify any prospective affiliation of his present employer.
  C. not render services to a new client until the client gives consent in writing.
  D. all of these answers are correct.
  D. all of these answers are correct.

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  Explanation

  The procedures for compliance with Standard III (B) state that members should not render services until receiving written consent from their employer to all of the terms of the arrangement, after having provided written statements describing the types of services to be rendered to independent affiliations. A member should also disclose to prospective clients the identity of the member's employer and clarify that the member is performing independently of the employer. The member should not render services until the client gives consent in writing indicating that the client has read and understood the member's written disclosure statement.

• Question 2387:

  Which of the following is not a cash flow that results from the decision to accept a project?

  A. Externalities.
  B. Shipping and installation costs.
  C. Opportunity costs.
  D. Changes in working capital.
  E. Sunk costs.
  E. Sunk costs.

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  Explanation

  Sunk cost is not a relevant cash flow.

• Question 2388:

  Two stocks, A and B, have the same price. However, stock A has a dividend growth twice that of stock B. If the recent dividend on A was half that on B, the expected return on A equals 5% and B's dividend growth rate is 2%, the expected return on B is:

  A. 1.75%
  B. 4. 0%
  C. 10%
  D. 2. 5%
  B. 4. 0%

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  Explanation

  In the usual notation, Po = D1/(k-g) and D1 = Do*(1+g). Hence, Po = Do*(1+g)/(k-g).

  The dividend growth rate of A equals 2 * 2% = 4%. We have been given PoA = PoB. Therefore, DoA*(1 + 4%)/(kA - 4%) = DoB*(1 + 2%)/(kB - 2%). Also, DoA = 0.5* DoB and kA = 5%. Thence, 0.5 * 1.04/(5% - 4%) = 1.02/(kB - 2%). Solving for kB gives the expected return on B equal to 3. 96%

• Question 2389:

  Liz Hurley is an investment advisor who has recently started advising a client, Zeta, regarding investment decisions. Zeta lives in Imphal, where investment laws are quite lax, almost non-existent. Hurley is domiciled in Britania, where investment laws clearly specify that the laws governing finance professionals in any given case are the laws that govern their clients. Britania laws, in general, are far stricter than the AIMR code of ethics. In her dealings with Zeta, Hurley must follow

  A. Imphal's laws.
  B. Britania's laws.
  C. AIMR's code of ethics.
  D. a combination of Britania's laws and AIMR code which results in a stricter set of laws.
  C. AIMR's code of ethics.

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  Explanation

  In her dealings with Zeta, Hurley is governed by Imphal's laws, as specified by Britania's laws. Since Imphal laws are almost non-existent, the code of ethics sets a stricter standard and hence, as an AIMR member, Hurley must follow the AIMR code. Standard I.

• Question 2390:

  A portfolio manager with Mally, Feasance, and Company is examining shares of Allcycles.com. Assume the following information:

  Annual Dividend: $0.45

  EPS: $2. 15

  Tax Rate: 35%

  Discount Rate: 12. 25%

  ROE: 18%

  Using this information, and assuming that ROE is expected to remain stable, what is the dividend growth rate for Clay Industries?

  A. 14. 64%
  B. 15. 51%
  C. 3. 77%
  D. 12. 67%
  E. The answer cannot be determined from the information provided.
  F. 14. 23%
  F. 14. 23%

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  Explanation

  To calculate the growth rate, use the following equation: {g = ROE(1 - Dividend Payout Ratio)}.

  While the ROE figure has been provided, the Dividend Payout Ratio must be calculated manually. To find the Dividend Payout Ratio, divide the annual dividend by the EPS figure, giving the following:

  {Dividend Payout Ratio = ($0.45/$2. 15)}

  From this equation, we determine that the Dividend Payout Ratio for this firm is 20.93%. Inputting this figure into the growth rate equation will yield a dividend growth rate of 14. 23% for this firm. As you can see, tax rates and discount rates are not factored into the calculation.