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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2571:

  Assume the following information about a large food distributor.

  Retention rate = 0.38 Net income / sales = 0.11 Total assets / common equity = 1.9 Sales / total assets = 0.69

  What is the expected annual growth rate of this firm's dividends?

  A. 8.94%
  B. None of these answers is correct.
  C. 5. 48%
  D. 11.51%
  E. 6. 14%
  F. The answer cannot be determined from the information provided.
  C. 5. 48%

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  Explanation

  A popular model for determining the growth rate of dividends is the following: g = RR * ROE

  Where: g = the expected growth rate of dividends, RR = the retention rate (this is equal to 1 - dividend payout ratio), and ROE = the return on equity. Although it may at first appear otherwise, all of the necessary information has been

  provided. Remember the Du Pont decomposition process for ROE, which breaks down the ROE figure into the following:

  ROE = (Net Income / Sales) * (Sales / Total Assets) * (Total Assets * Common Equity)

  Mathematically, this will reduce further into (Net Income / Common Equity)--- the ROE figure. The calculation of the return on equity for this company is as follows:

  ROE = [0.11 * 0.69 * 1.90] = 0.14421, or 14. 42%.

  Now that the ROE figure has been determined, the calculation of the growth rate of dividends is as follows:

  g = [(0.38) * 0.1442] = 0.054796, or 5. 48%

• Question 2572:

  What is the annual Internal Rate of Return of this series of annual cash flows: Year 0: <$15,000>, Year 1: $2,000, Year 2: $0, Year 3: $15,000, Year 4 to indicate a negative number).

  A. 25. 29%
  B. 18.91%
  C. 30.04%
  D. 22. 49%
  E. 25. 42%
  E. 25. 42%

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  Explanation

  On the BAII Plus, press CF 2nd CLRWork 15000 +/- ENTER DownArrow 2000 ENTER DownArrow DownArrow 0 ENTER DownArrow DownArrow 15000 ENTER DownArrow DownArrow 0 ENTER DownArrow DownArrow 18000 ENTER DownArrow DownArrow 2nd Quit. Then press Irr CPT. On the HP12C, press these keys: 15000 CHS BlueShift CFo 2000 BlueShift CFj 0 BlueShift CFj 15000 BlueShift CFj 0 BlueShift CFj 18000 BlueShift CFj. Then press YellowShift Irr. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure the BAII Plus has the P/Y value set to 1.

• Question 2573:

  Standard IV (B) is known as ________.

  A. Preservation of Confidentiality
  B. Duty to Employer
  C. Professional Misconduct
  D. Prohibition against Use of Material Nonpublic Information
  E. Interactions with Clients and Prospects
  F. Investment Process
  G. Fair Dealing
  H. None of these answers
  E. Interactions with Clients and Prospects

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  Explanation

  Standard IV (A) deals with the Investment Process. Standard III (B) deals with Duty to Employer. Standard IV (B.3) deals with Fair Dealing. Standard IV (B) deals with Interactions with Clients and Prospects. Standard V (A) deals with Prohibition against Use of Material Nonpublic Information. Standard IV (B.5) deals with Preservation of Confidentiality. Standard II (B) deals with Professional Misconduct.

• Question 2574:

  Which of the following is most likely to encourage a company to use more debt in its capital structure?

  A. All of these answers are correct.
  B. An increase in unit production.
  C. An increase in the corporate tax rate.
  D. An increase in the company's degree of operating leverage.
  E. An increase in the personal tax rate.
  C. An increase in the corporate tax rate.

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  Explanation

  A major reason for using debt is that interest is deductible, which lowers the effective cost of debt.

• Question 2575:

  Which of the following could increase outstanding capital stock?

  A. Conversion of bonds.
  B. All of these answers.
  C. The exercise of stock options.
  D. The exercise of warrants.
  E. The payment of stock dividends.
  B. All of these answers.

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  Explanation

  All of these answers would cause a firm's capital stock to increase. While the exercise of stock options or warrants offers a price to the buyer that is more favorable than the firm's current market price, these still result in the issuance of new shares. Likewise, the conversion of bonds to stock swaps debt for equity and the payment of stock dividends means that the firm is issuing new shares.

• Question 2576:

  Petersen Co. has a capital budget of $1,200,000. The company wants to maintain a target capital structure, which is 60 percent debt and 40 percent equity. The company forecasts that its net income this year will be $600,000. If the company follows a residual dividend policy, what will be its payout ratio?

  A. 20%
  B. 80%
  C. 60%
  D. 40%
  E. 0%
  A. 20%

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  Explanation

  The amount of new investment, which must be financed with equity, is: $1,200,000 x 40% = $480,000. Since the firm has $600,000 of net income only $120,000 will be left for dividends. This means the payout ratio is $120,000/$600,000 = 20%.

• Question 2577:

  Which is a characteristic of an open-end investment company?

  A. sells shares at a discount to NAV
  B. its stock trades on the secondary market
  C. sells no further shares
  D. market price of its shares is determined by supply and demand
  E. you receive the NAV price of any share sales
  E. you receive the NAV price of any share sales

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  Explanation

  When buying or selling shares of an open-end fund, an investor pays or receives the net asset value price of the fund plus or minus any possible loads.

• Question 2578:

  Technical analysts would feel that an upside-downside volume ratio with a value of 1.7 indicates that the market is

  A. breaching a resistance level.
  B. breaching a support level.
  C. is overbought.
  D. entering a significant market upswing.
  E. is oversold.
  C. is overbought.

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  Explanation

  Technical analysts may use the ratio of upside-downside volume as an indicator of short-term momentum for the market. They feel that a ratio value of 1.50 or more indicates that the market is overbought, while a ratio of 0.70 or less indicates that the market is oversold.

• Question 2579:

  Two mutually exclusive projects each have a cost of $10,000. The total, undiscounted cash flows from Project L are $15,000, while the undiscounted cash flows from Project S total $13,000. Their NPV profiles cross at a discount rate of 10 percent. Which of the following statements best describes this situation?

  A. To determine if a ranking conflict will occur between the two projects the cost of capital is needed as well as an additional piece of information.
  B. Project L should be selected at any cost of capital, because it has a higher IRR.
  C. The NPV and IRR methods will select the same project if the cost of capital is greater than 10 percent; for example, 18 percent.
  D. The NPV and IRR methods will select the same project if the cost of capital is less than 10 percent; for example, 8 percent.
  E. Project S should be selected at any cost of capital, because it has a higher IRR.
  C. The NPV and IRR methods will select the same project if the cost of capital is greater than 10 percent; for example, 18 percent.

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  Explanation

  The crossover rate is the discount rate at which the NPV profiles of the two projects cross and, thus, at which the projects' NPVs are equal. As long as the discount rate is greater than the crossover rate, both the NPV and IRR methods will lead to the same conclusion.

• Question 2580:

  The breadth of the market indicates:

  A. The traded volume by sectors.
  B. The total number of issues traded.
  C. The number of advances versus declines in a day.
  D. The range of instruments traded in the market.
  C. The number of advances versus declines in a day.

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  Explanation

  The "breadth" of the market is used to refer to the amount of activity spread across all the instruments traded (as against the activity being concentrated on a few stocks or instruments). One measure of this breadth is given by the number of price increases and decreases over the previous day. The difference between the two not only serves as a partial explanation of the change in market direction but also indicates whether a rise or fall in the market is pervasive or influenced by a concentrated group of traded securities.