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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2581:

  Which of the following is/are true about monetary policy?

  I. The money supply is neutral in the long-run.

  II. Monetary policy can only serve to decrease economic volatility.

  III.

  Of the monetary aggregates, Central Bankers only have direct control over the monetary base.

  A. I, II, III
  B. III only
  C. I only
  D. I, III
  E. none of these answers is correct
  F. II only
  C. I only

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  Explanation

  In the long-run, relative prices are important, not the price level itself. To understand why, imagine if your salary increased by ten times but so did the price of all the goods you buy. This would be a neutral event. If money is neutral, then monetary policy can have no long-term effect. However, in the short-term, changes in the price level can cause producers to change their production choices, ostensibly helping to smooth out the business cycle. Central Bankers generally have control over the bank reserve requirement and the level of currency. They do not have control over the amount of currency individuals put into deposit accounts which could later be lent out by banks. Hence, Bankers control the monetary base, but not other money aggregates such as M2 and M3.

• Question 2582:

  Given that the beginning value of a stock is $120, the ending value is $110, earnings are $40, and the retention rate of earnings is 0.6, what is the rate of return on the stock over this period?

  A. 6%
  B. 5. 7%
  C. 5%
  D. -8.3%
  E. Not enough information.
  C. 5%

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  Explanation

  The dividend payout ratio is equal to one minus the retention rate (1 - 0.6 = 0.4). Dividends are equal to the dividend payout ratio multiplied by earnings (0.4 x 40 = $16). The rate of return is equal to the ending price plus the dividend payments, divided by the beginning price, minus one. In this question, the rate of return is [(110 + 16)/ 120] - 1 = 0.05 = 5%.

• Question 2583:

  What annual interest rate, compounded annually, would cause a series of 20 deposits of $1,000 to accumulate to $40,000, if the first deposit is made one year from today?

  A. 6. 77%
  B. 8.03%
  C. 7. 23%
  D. 5. 09%
  E. 14. 98%
  A. 6. 77%

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  Explanation

  On the BAII Plus, press 20 N, 0 PV, 1000 PMT, 40000 +/- FV, CPT I/Y. On the HP12C, press 20 n, 0 PV, 1000 PMT, 40000 CHS FV, i. Make sure that the BAII Plus has the P/Y value set to 1.

• Question 2584:

  Under an inflationary environment with a constant inventory quantity, the LIFO Reserve tends to ________.

  A. increase over time.
  B. decrease over time.
  C. stays constant over time.
  D. fluctuate with COGS.
  A. increase over time.

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  Explanation

  As prices increase and LIFO layers are maintained, the inventory value at FIFO keeps increasing while that at LIFO remains constant. Hence, the reserve keeps increasing.

• Question 2585:

  A technical analyst would sell a stock when

  A. it leaves the bottom end of a flat trend channel.
  B. it is in a rising trend channel.
  C. it leaves the declining trend channel.
  D. it is in a trough.
  A. it leaves the bottom end of a flat trend channel.

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  Explanation

  When the price of a stock falls below the bottom end a flat trend channel, a technical analyst would probably predict the beginning of a declining trend, and would sell the stock.

• Question 2586:

  In the U.S. economy, suppose it is found that every 5% increase in GNP is associated with an 8% increase in SandP sales, with a negligible intercept term. Further, the net profit margin on SandP 500 is 8.2%. If the earnings multiplier on SandP 500 changes from 11.3 to 11.9 and the GNP declines by 2%, the change in the SandP 500 index value equals ________.

  A. -8.08%
  B. -5. 29%
  C. +5. 03%
  D. +1.94%
  D. +1.94%

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  Explanation

  The 2% decline in GNP will cause a decline of 2/5 * 8 = 3. 2% SandP sales. This will cause a decline in earnings per share of 3. 2%, too (NOT 8.2% * 3. 2%). Since index value = earnings multiplier * earnings per share, the change in SandP 500 equals (1-0.032)*11.9/11.3 - 1 = +1.94%.

• Question 2587:

  Which of the following statements best describes the theories of investors' preferences for dividends?

  A. The tax preference theory suggests that a company can increase its stock price by increasing its dividend payout ratio.
  B. One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.
  C. The clientele effect suggests that companies should follow a stable dividend policy.
  D. Modigliani and Miller argue that investors prefer dividends to capital gains.
  E. The bird-in-hand theory suggests that a company can reduce its cost of equity capital by reducing its dividend payout ratio.
  C. The clientele effect suggests that companies should follow a stable dividend policy.

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  Explanation

  Different groups, or clientele, of stockholders prefer different dividend payout policies. Stockholders in a low or tax-free tax bracket generally prefer cash income, so a payout would be their preference. On the other hand, stockholders in a high tax bracket might prefer reinvestment of earnings because they have little need for current investment income. To the extent that stockholders can switch firms, a firm can change from one dividend payout policy to another to let stockholder who do not like the new policy sell to other investors who do. Yet this would be costly because of brokerage costs, the capital gains taxes that would have to be paid by the selling stockholders, and the chance that there will be a net loss of investors who like the firm's new dividend policy. Management should therefore, probably not change its policy. Several studies show that there is a clientele effect, which is the tendency of a firm to attract a set of investors who like its dividend policy. The existence of the clientele effect does not necessarily imply that one dividend policy is better than another.

• Question 2588:

  Preferred and common stock differ in that

  A. failure to pay dividends on common stock will not force the firm into bankruptcy, while failure to pay dividends on preferred stock will force the firm into bankruptcy.
  B. common stock dividends are a fixed amount, while preferred stock dividends are not.
  C. preferred stock dividends are deductible as an expense for tax purposes, while common stock dividends are not.
  D. preferred stock has a higher priority than common stock with regard to earnings and assets in the event of bankruptcy.
  E. none of these answers.
  D. preferred stock has a higher priority than common stock with regard to earnings and assets in the event of bankruptcy.

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  Explanation

  In the event of bankruptcy, the claims of preferred shareholders must be satisfied before common shareholders receive anything. The interests of common shareholders are secondary to those of other claimants.

• Question 2589:

  Martin Fillmore is a big football star who has been offered contracts by two different teams. The payments (in millions of dollars) he receives under the two contracts are listed below: Team A Team B TimeCash FlowsCash Flows

  08.02. 5

  14. 04. 0

  24. 04. 0

  34. 08.0

  44. 08.0

  Fillmore is committed to accepting the contract that provides him with the highest net present value (NPV). At what discount rate would he be indifferent between the two contracts?

  A. 16. 49%
  B. 10.85%
  C. 11.35%
  D. 19.67%
  E. 21.03%
  C. 11.35%

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  Explanation

  First, find the differential CFs by subtracting Team A CFs from Team B CFs (or vice versa). Enter these into the cash flow register; then solve to find IRR/YR to get the discount rate for which he is indifferent between the two contracts, 11.35% .

• Question 2590:

  In valuing the stock of Evergreen Enterprises, an analyst compiles the following information about the firm: The value of the firm's stock today is closest to:

  A. $31.80
  B. $38.55
  C. $53. 00
  A. $31.80

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  Explanation