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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2531:

  Given the following points: (-2, 0), (-1,0), (0,1), (1, 1) and (2, 3) What is the Y intercept of the regression line?

  A. 1.0
  B. None of these answers
  C. 1.5
  D. 0.7
  E. 0.0
  A. 1.0

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  Explanation

  For this, you need to create tables with columns for X,Y,XY,X^2,Y' and Y-Y'. This will be as follows. XYXY X^2 Y'Y-Y' -2004-0.40.4 -10010.3-0.3 010010 11111.7-0.7 23642. 40.6 Sum057100 N=5. The regression equation is Y' = a + bX. First, find the slope, which is b, use the formula b = [n(SXY)-(SX)(SY)]/[n(SX^2)-(SX)^2] where S stands for "Sum of." b = [5(0)-(0)(5)]/[5(10)-0]=0.7 The Y intercept is a. a = [S(Y)/n]-b[SX/n] a = 5/5 - 0.7[0/5] = 1.

• Question 2532:

  According to Standard IV (B.4), Priority of Transactions, ________ is recommended when a manager has purchased a security in violation of trading policy.

  A. forfeit of wages for one month
  B. a fine imposed by the SEC
  C. a civil damage
  D. public censure
  E. disgorgement
  E. disgorgement

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  Explanation

  This question relates to the compliance procedures for Standard IV (B.4), one of which states that firms should establish disciplinary procedures to enforce the standard. If a manager has purchased a security in violation of trading policy, disgorgement is recommended. Managers should disgorge all profits and assume any losses from the trade.

• Question 2533:

  An independent investment advisor is examining shares of Claypool Manufacturing, Inc. for possible investment. In her examination, this investment advisor has gathered the following information:

  Market discount rate: 12. 5% per year Observed Price/Earnings ratio: 14. 25 Given this information, what is the Franchise Price/Earnings ratio for Claypool Manufacturing?

  A. None of these answers is correct.
  B. 6. 25
  C. 24. 25
  D. The answer cannot be calculated from the information provided.
  E. 12. 67
  F. 16. 28
  B. 6. 25

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  Explanation

  The Franchise Factor method of value measurement is in many respects similar to EVA and MVA calculations. When examining a company using the franchise value approach, the observed price-to-earnings ratio is broken down into its two

  components - (1) the "base P/E," which is based on the Company's ongoing performance, and (2) a "franchise P/E" that is based on the expected value of new and profitable business opportunities. This relationship is illustrated as follows:

  Franchise P/E = Observed P/E - Base P/E

  Where the Base P/E equals the reciprocal of the market discount rate. For example, if the market discount rate is 12. 5%, the base P/E would be equal to (1 / 12. 5%) = 8.

  In this example, all the necessary information has been provided, and the calculation of the Franchise P/E is as follows:

  Franchise P/E = (14. 25 - 8) = 6. 25

• Question 2534:

  Latham has been following a publicly traded oil firm, Techron Oil. Recently, he read a review about the oil fields in Venezuela, to the effect that the actual oil content of the fields across the country might be as much as 35% higher than previously estimated. Techron owns sizable properties in Venezuela and Latham has concluded that the research report implies that Techron might have as much as a million gallons a day in excess capacity that has not been factored into the stock price. In his report, he properly attributed the original review as the source of his information and recommended that in his opinion, Techron's stock was an immediate BUY. Latham has

  I. violated Standard V (A) - Prohibition against Use of Material, Non-Public Information.

  II. violated Standard IV (A.2) - Research Reports by failing to distinguishing between fact and opinion.

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

  IV.

  violated Standard II (C) - Prohibition against Plagiarism.

  A. II, III and IV only
  B. III only
  C. none of them
  D. I and III only
  B. III only

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  Explanation

  Since the review was publicly available, Latham has not violated Standard V (A) - Prohibition against use of Material, Non-Public Information. Also, because he properly attributed his original source, he has not plagiarized according to Standard II (C). However, by not carrying out an independent study to verify that his conclusions were indeed warranted, he violated Standard IV (A.1) - Reasonable Basis and Representations. Note that he has not confused fact with opinion and therefore not violated Standard IV (A.2) - Research Reports.

• Question 2535:

  Harold Stone, CFA, is an analyst for Spartacus Venture Capital. Stone is considering investing $3 million in a project with a potential $150 million return over a ten year life. The current risk-free rate is 5%, the equity risk premium is 5%, and the project's beta is 2. 0. Stone believes that the project has a 22% probability of failure in the first four years and 13% thereafter. The expected net present value of the project is closest to:

  A. SI million
  B. $2 million
  C. $3 million
  C. $3 million

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  Explanation

• Question 2536:

  A firm's gross profit margin equals 35. 2% and the operating profit margin equals 26. 7%. If its net sales equal 6,128, the firm's SGA expenses equal ________.

  A. 448
  B. 521
  C. 496
  D. 357
  B. 521

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  Explanation

  Gross Profit Margin = Gross Profit/Net sales and Operating Profit Margin = Operating Profit/Net sales. Therefore, Gross Profit = 6,128*0.352 = 2,157 and Operating Profit = 6,128*0.267 = 1,636. Now, Operating profit = income before interest, depreciation and taxes (EBDIT)= Gross Profit - Sales and General Expenses, so 2,157 - 1,636 = 521.

• Question 2537:

  The infinite period Dividend Discount Model is likely to be more effective in the case of a ________.

  A. mature firm
  B. all of these answers
  C. small firm
  D. growth firm
  A. mature firm

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  Explanation

  The infinite period Dividend Discount Model assumes a constant dividend growth rate (which could well be zero). This assumption is only reasonable for a mature firm that has settled in its industry. A growth firm will have highly erratic dividends, depending on the available cash flows.

• Question 2538:

  Green Grocers is deciding among two mutually exclusive projects. The two projects have the following cash flows: Project A Project B Time Cash Flows Cash Flows 0-$50,000-$30,000 110,000 6,000 215,000 12,000 340,000 18,000 420,000 12,000 The company's cost of capital is 10 percent (WACC = 10%). What is the net present value (NPV) of the project with the highest internal rate of return (IRR)?

  A. $7,090
  B. $12,510
  C. $8,360
  D. $11,450
  E. $15,200
  E. $15,200

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  Explanation

  NPV(A) = $15,200; IRR(A) = 21.3811%.

  NPV(B) = $7,092; IRR(B) = 19.2783%.

  Project A has the highest IRR, so the answer is $15,200.

• Question 2539:

  Sid Barnes is the senior most partner with Noble and Noble, a well-known brokerage firm. Bruce Lohmann is a senior partner who reports to Barnes. Lohmann is an AIMR member while Barnes is not. Recently, NandN's research department identified a sterling investment opportunity and Barnes decided to allow some of the largest discretionary accounts to benefit from this first. He directed Lohmann to take the appropriate steps and in turn, Lohmann assigned Doug Jardine, a senior analyst, to complete the portfolio rebalancing. Doug, an AIMR member, informed Bruce and Barnes that such a course of action would be in violation of the AIMR Standard IV (B.3) - Fair Dealing. Barnes told him that he was not aware of any such code and that in any case, the firm had not adopted it. If Doug refuses to carry out the action but Lohmann does, which of the following is/are true?

  I. Barnes has violated the AIMR code.

  II. Lohmann has violated the AIMR code.

  III.

  Doug has violated the AIMR code by disobeying his superiors.

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

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  Explanation

  Barnes cannot be said to have violated the AIMR code since he's not a member or a CFA candidate and does not have to abide by those rules. Lohmann, on the other hand, has violated the code in two ways: first, as the senior most AIMR member in the firm, it was his responsibility to ensure that Barnes knew not only about the AIMR code but also Lohmann's obligation to uphold it. Barnes' ignorance about the code implies Lohmann violated Standard III (A) - Obligation to Inform Employer of Code and Standards. Second, by allowing some of the largest discretionary accounts to benefit from the research first, he violated AIMR standard IV (B.3) - Fair Dealing. Doug, on the other hand, dissociated himself from the activity and did not violate any standard.

• Question 2540:

  From tax perspective, which of the following depreciation methods is usually the best?

  A. Double declining
  B. Modified accelerated
  C. Straight line
  D. Sum-of-digits
  A. Double declining

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  Explanation

  Since Double Declining results in the biggest depreciation expense of the four in the initial years, it allows the biggest deferral of tax payments. These deferrals can sometimes be for an indefinite period, thus avoiding them almost altogether.