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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2391:

  The technicians' interpretation of the confidence index assumes that changes in the yield spread are caused

  A. almost entirely by changes in investor demand.
  B. in equal parts by changes in the supply of bonds and changes in investor demand.
  C. mostly by changes in the supply of bonds.
  D. almost entirely by changes in the supply of bonds.
  A. almost entirely by changes in investor demand.

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  Explanation

  Technicians interpret the confidence index as indicative of broader investment bullishness or bearishness toward the market. But changes in the relative yields of bonds (which determine the value of the index) can be caused by changes in the supply of bonds as well as by changes in investor demand.

• Question 2392:

  The allocation of shares in oversubscribed IPOs to investment managers for their personal account is a perk that is most clearly a violation of Standard ________.

  A. II (B) - Professional Misconduct
  B. IV (A.3) - Independence and Objectivity
  C. None of these answers
  D. IV (B.6) - Prohibition against Misrepresentation
  E. IV (B.8) - Disclosure of Referral Fees
  B. IV (A.3) - Independence and Objectivity

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  Explanation

  External sources may try to influence the investment process by offering analysts and portfolio managers a variety of perks. Corporations may be seeking expanded research coverage; issuers and underwriters may wish to promote new securities offerings; brokers typically want to increase commission business. The perks may include gifts, invitations to lavish functions, tickets and so on. One type of perk that has gained particular notoriety is the allocation of shares in oversubscribed IPOs to investment managers for their personal accounts. This practice is a violation under Standard IV (A.3).

• Question 2393:

  Money market funds attempt to ________.

  I. provide current income and safety of principal

  II. provide liquidity

  III. hedge the investor's risk

  IV.

  provide long-term capital gain

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

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  Explanation

  Money market funds attempt to provide current income with some safety of principal and some liquidity by investing in a diversified portfolio of short-term securities.

• Question 2394:

  Relationships with and Responsibilities to the Profession are dealt with under:

  A. Standard II
  B. Standard IV
  C. None of these answers
  D. Standard I
  E. Standard V
  F. Standard III
  A. Standard II

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  Explanation

  Relationships with and Responsibilities to the Profession are dealt with under Standard II.

• Question 2395:

  Which of the following rules are essential to successful cash flow estimates, and ultimately, to successful capital budgeting?

  A. All of the statements are correct.
  B. Only incremental cash flows are relevant to the accept/reject decision.
  C. The return on invested capital is the only relevant cash flow.
  D. None of the statements are correct.
  E. Total cash flows are relevant to capital budgeting analysis and the accept/reject decision.
  B. Only incremental cash flows are relevant to the accept/reject decision.

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  Explanation

  Incremental cash flows are the net cash flows attributable to an investment project and are the only cash flows relevant in capital budgeting.

• Question 2396:

  Which of the following best describes retained earnings?

  A. All of these answers.
  B. None of these answers.
  C. Retained earnings represent the cumulative net profits a firm since inception.
  D. Retained earnings represent the sum total of cash obtained from the sale of common stock to investors.
  E. Retained earnings represent the cumulative net profits of a firm since inception, minus cumulative dividends paid to common stockholders.
  E. Retained earnings represent the cumulative net profits of a firm since inception, minus cumulative dividends paid to common stockholders.

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  Explanation

  Retained earnings represent the earned capital of a firm. It consists of the accumulated undistributed earnings (net profits, less cash dividends) of a firm since inception.

• Question 2397:

  Use the following financial data on Enterprise:

  a.

  Sale of equipment $32,000

  b.

  Loss on equipment sale $9,000

  c.

  Dividends paid $12,500

  d.

  Purchase of an office suite $104,000

  e.

  Common stock repurchase $45,000

  f.

  Dividends received from investments $8,500

  g.

  Interest received on Treasury bonds $1,200

  h.

  Supplier accounts paid $3,700

  i.

  Cash collection from customers $14,200

  j.

  Ending cash balance $98,000

  A. $32,700
  B. $29,200
  C. $20,200
  D. $7,700 The operating cash flow for 1998 was ________.
  C. $20,200

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  Explanation

  Items f, g, h and i are operating events.

• Question 2398:

  You are faced with a counting problem in which the number of outcomes is infinite. The counting method you should use is:

  A. The multinomial formula.
  B. The multiplication rule.
  C. The binomial formula.
  D. None of these answers is correct.
  D. None of these answers is correct.

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  Explanation

  If the number of outcomes is infinite, a counting method should not be used at all, and the question cannot be answered with counting methods. None of the above is the correct response.

• Question 2399:

  If a firm's asset turnover were to increase by 10% and the tax rate were to increase from 35% to 40%, leaving all else constant, the resultant change in the firm's ROE equals ________.

  A. -2. 3%
  B. -1.9%
  C. +1.5%
  D. -1.1%
  C. +1.5%

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  Explanation

  ROE = Net income/Equity. Using the Extended duPont System, = (EBT/sales)*(sales/total assets)*(total assets/equity)*(1-tax rate) The asset turnover ratio equals sales/total assets. Therefore, ROE(after)/ROE(before) = [asset turnover(after)/ asset turnover(before)*]*[0.6/0.65] = 1.1*0.6/0.65 = 1.015. Thus, the ROE increases by 1.5%.

• Question 2400:

  A firm has an ROE of 13% and a required rate of return on the stock of 16%. The firm currently has a dividend payout ratio of 26%. Investors pay no personal taxes on dividends. To increase value, it must:

  A. change its retention ratio to 1. B. incomplete information to answer.
  C. reduce its payout ratio to around 5%.
  D. pay out all of its earnings as dividends.
  D. pay out all of its earnings as dividends.

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  Explanation

  If the firm cannot invest the funds at a rate of return at least equal to that which the investors require, then the shareholders are better off if the firm pays out all it earns (provided these distributions are not taxed) so that the investors can invest the funds on their own at higher rates.