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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2411:

  When investors are bullish about the stock market,

  A. money market funds tend to loose popularity.
  B. money market funds tend to grow in popularity.
  C. money market fund volatility decreases.
  D. returns on money market funds tend to decrease.
  A. money market funds tend to loose popularity.

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  Explanation

  When investors are bullish about the stock market, they tend to withdraw funds from money market funds in order to invest in stocks or stock funds. When investors are cautious about the stock market, they tend to shift funds from stocks into safer money market funds.

• Question 2412:

  The real risk free rate is 6% per year and the expected inflation rate is 2% per year. What is the annual nominal rate of interest?

  A. Not able to compute with the above data.
  B. 8.1%
  C. 4%
  D. 8%
  B. 8.1%

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  Explanation

  Nominal rate = (1.06)*(1.02)=8.1%.

• Question 2413:

  If the one month FF/$ exchange rate is 8.0200-50 this implies:

  A. the bank is willing to commit itself today to sell dollars in one month for 8.0200 francs or to buy them for 8.0250 francs.
  B. the bank is willing to commit itself today to buy dollars in one month for 8.0200 francs or to sell them for 8.0250 francs.
  C. the bank is willing to commit itself today to buy dollars for 8.0200 francs or to sell them for 8.0250 francs.
  D. the bank is willing to commit itself today to buy dollars in one month for 8.0200 francs or to sell them for 8.0150 francs.
  E. none of these answers
  B. the bank is willing to commit itself today to buy dollars in one month for 8.0200 francs or to sell them for 8.0250 francs.

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  Explanation

  In a forward, or futures, contract, a commitment is irrevocably made on the transaction date, but delivery takes place later, here a month later. The bid-ask quotation here implies that the bank is willing to commit itself today to buy dollars in one month for 8.0200 francs or to sell them for 8.0250 francs.

• Question 2414:

  Assume an investor makes the following investments:

  During year one, the stock paid a $5. 00 per share dividend. In year 2, the stock paid a $7. 50 per share dividend. The investor's required return is 35. 0 percent.

  The dollar-weighted return is:

  A. 48.9%.
  B. 16. 1%.
  C. 46. 5%.
  D. 102. 4%.
  A. 48.9%.

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  Explanation

  To calculate the dollar-weighted return:

  Step 1: Determine the timing and sign (inflow, outflow) of the cash flows

  Purchase share 2, $75. 00 outflow

  Received dividend from share 2, $7. 50 inflow

  Sell share 1, $100.00 inflow,

  Sell share 2, $100.00 inflow.

  Step 2: Calculate the net cash flows for each year (all amounts in $)

  Step 3: Use your financial calculator to solve for IRR (or use trial and error)

  

• Question 2415:

  The management of Microscam International, a large software manufacturer, is examining its capital structure. The firm is financed according to the following schedule based on market values:

  40% debt

  50% common stock

  10% perpetual preferred stock

  Additionally, consider the following information:

  Yield on outstanding debt: 9.25%

  Tax rate: 35%

  Annual preferred dividend: $2. 02

  Preferred stock price: $17. 44

  Return on equity: 22%

  Dividend payout ratio: 15%

  Cost of common stock: 15. 40%

  Using this information, what is the Weighted Average Cost of Capital for Microscam?

  A. 11.08%
  B. 11.12%
  C. None of these answers.
  D. 10.88%
  E. 11.26%
  F. The answer cannot be completely calculated from the given information.
  E. 11.26%

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  Explanation

  In order to calculate the WACC, it is necessary to first calculate the component after-tax cost of debt, common equity, and preferred equity. Once the cost of these components is determined, they are imputed into the WACC equation, which is

  as follows:

  {WACC = [(% weight of debt securities * cost of debt) + (% weight of common stock * cost of common stock) + (% weight of preferred stock * cost of preferred stock)]} To calculate the component cost of debt, use the following equation: {Aftertax cost of debt = [yield on outstanding debt securities * (1 - tax rate)} Factoring in the given information into this equation would yield the following:

  {After-tax cost of debt = [9.25% * (1 - 0.35%)]} = 6. 013%

  To calculate the component cost of outstanding preferred stock, the following equation must be used:

  {Cost of preferred stock = [annual dividend / preferred stock price]}

  {Cost of preferred stock - = [$2. 02 / $17. 44]} = 11.58%.

  The final component of the WACC calculation, the cost of common equity, has been provided as 15. 40%.

  Now that the after-tax cost of debt, preferred stock, and common stock have been determined, the WACC calculation can be found. The calculation of the WACC is as follows: {[0.40 * 0.06013] + [0.50 * 0.1540] + [0.10 * 0.1158]} = 11.263%.

• Question 2416:

  Closed end funds sell

  A. none of these answers.
  B. at a price equal to its NAV.
  C. at a premium over its NAV.
  D. at a discount from its NAV.
  D. at a discount from its NAV.

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  Explanation

  Historically, the market price of a closed end fund has been 5 to 20 percent below the NAV of the fund.

• Question 2417:

  Fiscal policy designed to increase aggregate demand during economic downturns and decrease aggregate demand during economic booms is called

  A. expansionary fiscal policy.
  B. supply-side fiscal policy.
  C. new classical fiscal policy.
  D. counter-cyclical fiscal policy.
  D. counter-cyclical fiscal policy.

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  Explanation

  Counter-cyclical fiscal policy promotes the economy's use of its "automatic stabilizers": government expenditures should rise during recessions (increasing aggregate demand) and should fall during economic booms (decreasing aggregate demand).

• Question 2418:

  Which of the following is/are true?

  I. Proponents of efficient markets believe that new information is impounded correctly and gradually in stock prices.

  II. Technical analysts believe that new information spreads through the market rapidly and gets reflected in the prices, thus moving the markets.

  III.

  Fundamental analysts believe that stock prices are determined by supply and demand in the security markets.

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

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  Explanation

  Technicians believe that new information seeps into prices only gradually whereas efficient market theorists believe that this adjustment is extremely rapid; too rapid to allow consistent and systematic exploitation of particular kinds of information like dividend changes.

  As in any other market, prices in security markets are determined by supply and demand; this is not in dispute between technicians and non-technicians. What is in dispute is the source and nature of demand for securities; technicians believe that demand adjusts slowly to new information while non-technicians consider the process to be almost instantaneous.

• Question 2419:

  Consider the following information about a natural gas driller:

  Next annual dividend: $1.18 Earnings per share next year: $4. 60 Anticipated growth rate: 12. 5% per year Required rate of return: 15% per year

  What is the expected earnings multiplier for this utility company?

  A. 12. 46
  B. 10.26
  C. 53. 10
  D. 15. 59
  E. 47. 20
  F. None of these answers is correct.
  B. 10.26

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  Explanation

  To determine the earnings multiplier (i.e. the price-to-earnings ratio) for an individual company, use the following formula:

  P/E = [(d1 / e1) / (k - g)]

  Where: P/E = the earnings multiplier, d1 / e1 = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated future growth rate.

  In this example, all of the necessary information has been provided, but some rearranging is necessary.

  Specifically, the dividend payout ratio must be determined. This figure is found as follows:

  Dividend payout ratio = [$1.18 / $4. 60] = 0.256522, or 25. 65%

  Now that the dividend payout ratio has been determined, we can solve for the appropriate earnings multiplier. The calculation of this figure is found as follows:

  P/E = [0.2565 / (0.15 - 0.125)] = 10.26

  In generally favorable economic conditions, this is a pretty realistic multiple for an average natural gas drilling company.

• Question 2420:

  Armando Delrio, a quantitative analyst with Brown Brothers Brokerage, has been instructed to create a regression analysis comparing the relationship between same store sales figures for a batch of retail stocks and marketing expenses for the same series of stocks. In order to adhere to the traditional seven-step method of hypothesis testing, Armando should begin his analysis by performing which of the following actions? Choose the best answer.

  A. Formulating the hypothesis
  B. Collecting the data
  C. Stating the significance level
  D. None of these answers is correct
  E. Identifying the test statistic
  F. Identifying the probability distribution
  A. Formulating the hypothesis

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  Explanation

  Hypothesis testing involves a series of seven explicit steps:

  Step 1: Formulating and stating the hypothesis Step 2: Identifying the appropriate test statistic and its probability distribution Step 3: Specifying the significance level Step 4: Stating the decision rule Step 5: Collecting the data and performing the necessary calculations Step 6: Making the statistical decision Step 7: Making the economic/investment decision.

  In this example, Armando Delrio, a quantitative analyst, has been instructed to perform a regression analysis in which a hypothesis is tested. The first step in this process is the formulation of the hypothesis.