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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2481:

  Bill Turner is a security analyst for Secure-Invest Inc. The firm has concerns about the equal borrowing and lending rate assumption made by the traditional capital asset pricing model (CAPM), and, instead, tells Turner to use the zero-beta CAPM when selecting assets. Turner finds that the return on the zero-beta portfolio exceeds the risk-free rate. Which of the following most accurately describes the effect of relaxing the equal borrowing and lending assumption?

  A. The slope of the security market line will increase.
  B. The slope of the security market line will decrease.
  C. The slope of the security market line will stay the same.
  B. The slope of the security market line will decrease.

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  Explanation

• Question 2482:

  A market strategist with East Coast Brokerage is examining a stock market series and trying to determine an appropriate EPS figure. In her analysis, this market strategist has determined the following information:

  1. Regressing sales for the series against Nominal GDP, the sales figure for the index has been estimated at: $21. 2. Analyzing capacity utilization rates, foreign competition, rates of inflation and unit labor costs, the operating profit margin for the series has been determined to be 32%.

  3. Creating a time series based upon inputs such as levels of capital expenditures and PPandE turnover, next year's depreciation-per-share has been determined to be $1.10.

  4. Creating a time series based upon levels of debt outstanding and prevailing debt yields, the interest expense for next year is determined to be $1.03 per share.

  5. Coordinating his research with a legislative consultant, the corporate tax rate for this series has been estimated at: 35. 15%. Using this information, what is the EPS figure for this stock market series?

  A. None of these answers is correct.
  B. $2. 23
  C. $2. 98
  D. The answer cannot be determined from the information provided.
  E. $4. 01
  F. $4. 07
  C. $2. 98

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  Explanation

  All of the necessary information has been provided in this example. To determine the EPS for a stock market series, the following steps are necessary:

  Step 1: Estimate sales-per-share for the series: Step 2: Estimate operating profit margin for the series Step 3: Estimate the depreciation-per-share for next year Step 4: Estimate the interest expense-per-share for the next year Step 5: Estimate next year's corporate tax rate

  Once these five steps have been completed, the calculation of EPS for a stock market series is found by the following:

  EPS = [(Sales per share * Operating profit margin) - Depreciation-per-share - Interest Expense] * (1 -Corporate Tax Rate)

  The calculation of EPS for this stock market series is shown as follows: EPS = [($21 * 0.32) - $1.10 - $1.03] * (1 - 0.3515) = $2. 98

• Question 2483:

  Variables X and Y are perfectly negatively correlated. Given only this information, if you run a regression of Y against X, which of the following is/are true?

  I. The intercept term is zero.

  II. The slope equals 1. III. R-square equals 1. IV.

  The percentage of unexplained variance equals 100%.

  A. I only
  B. III and IV
  C. IV only
  D. I and II
  E. III only
  F. I and III
  G. II only
  E. III only

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  Explanation

  If Y = aX + b, then X and Y are perfectly negatively correlated for any value of b and any negative value of a. Hence, given the information in the question, the slope must be negative but not necessarily equal to 1 and the intercept term cannot be determined. Since the correlation coefficient is 1, R-square is also 1, as expected, since all the variation in Y can be explained by variation in X. Note that the percentage of unexplained variance equals zero.

• Question 2484:

  Under the Percentage-of-completion method of recognizing contract revenue, common methods of estimation of completion include all of the following except:

  A. Ratio of units completed to total units expected to be completed.
  B. Ratio of costs incurred by expected total costs.
  C. Ratio of profits of the company year to date to expected profits for the year of the company.
  D. Ratio of units delivered to total units expected to be delivered.
  C. Ratio of profits of the company year to date to expected profits for the year of the company.

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  Explanation

  This method attempts to match expenses with revenues and profits. Revenues recognized would not be based on the expected profits for the company during the year.

• Question 2485:

  If the MM hypothesis about dividends is correct, and if one found a group of companies which differed only with respect to dividend policy, which of the following statements would be most correct?

  A. All of these statements are true.
  B. The residual dividend model should not be used, because it is inconsistent with the MM dividend hypothesis.
  C. The total expected return, which in equilibrium is also equal to the required return, would be higher for those companies with lower payout ratios because of the greater risk associated with capital gains versus dividends.
  D. None of these statements are true.
  E. If the expected total return of each of the sample companies were divided into a dividend yield and a growth rate, and then a scatter diagram (or regression) analysis were undertaken, then the slope of the regression line (or b in the equation D1/Po = a + b(g)) would be equal to +1.0.
  D. None of these statements are true.

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  Explanation

  None of these statements are correct. Miller and Modigliani argued that the value of the firm depends only on the income produced by its assets, not on how this income is divided between dividends and retained earnings.

• Question 2486:

  What is the purpose of information presented in notes to the financial statements?

  A. To provide disclosures required by generally accepted accounting principles.
  B. To present management's responses to auditor comments.
  C. To provide recognition of amounts not included in the totals of the financial statements.
  D. To correct improper presentation in the financial statements.
  E. None of these answers.
  A. To provide disclosures required by generally accepted accounting principles.

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  Explanation

  Users of the financial information are the focus of financial reporting. GAAP requires disclosures in the notes to facilitate the users' understanding of the financial statements.

• Question 2487:

  Using a time series, an economist with Churn Brothers Brokerage examines the relationship between the historical earnings multiple of the banking industry with that of the SandP 500 index. The results of this time series are used to project an estimate of the future earnings multiple for the banking industry. Which of the following best characterizes this method of forecasting an industry earnings multiple? Choose the best answer.

  A. Monte Carlo simulation
  B. Macroanalysis
  C. Time series regression
  D. Microanalysis
  E. None of these answers is correct
  F. Porter Method
  B. Macroanalysis

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  Explanation

  The method profiled in this example is "macroanalysis," which is one of two methods for estimating the earnings multiplier of an industry. Macroanalysis 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.

  The macroanalysis method is contrasted by microanalysis, which involves examining the variables underlying the earnings 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 "Porter Method" is used to examine the level of competition in an industry, and "Monte Carlo simulation" is a method of measuring stand-alone risk. While "time series regression" is an appealing choice, it does not represent the best possible answer.

• Question 2488:

  The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment?

  A. 4. 35 years
  B. 4. 00 years
  C. 5. 23 years
  D. 4. 86 years
  E. 6. 12 years
  D. 4. 86 years

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  Explanation

  Using the even cash flow distribution assumption, the project will completely recover initial investment after 30/35 = 0.86 of Year 5: Payback = 4 + 30/35 = 4. 86 years.

• Question 2489:

  Kathy Hurst, CFA, is valuing a 4-year zero coupon security. She is provided the following information:

  6. 0%

  7. 3% ? 8.9%

  The 4-year spot rate is 7. 5%.

  Calculate the one-year forward rate two years from now ().

  A. 7. 3%.
  B. 7. 8%.
  C. 8.0%.
  B. 7. 8%.

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  Explanation

  E

• Question 2490:

  Which one of the following actions will not help to ensure the fair treatment of brokerage firm clients when a new investment recommendation is made?

  A. Minimize elapsed time between the decision and the dissemination of a recommendation.
  B. Limit the number of people in the firm who are aware in advance that a recommendation is to be disseminated.
  C. Distribute recommendations to institutional clients prior to individual accounts.
  D. Monitor the trading activities of firm personnel.
  C. Distribute recommendations to institutional clients prior to individual accounts.

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  Explanation

  This question deals with Standard IV (B.3), Fair Dealing. All the procedures listed will help members treat clients fairly, except distributing recommendations to institutional clients prior to individual accounts. This practice discriminates among clients based on size and class of assets and is a violation of Standard IV (B.3).