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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2611:

  Clay Industries, a large industrial firm, is examining the operating leverage of its tooling division during the last year. Consider the following information:

  % change in EBIT during the last year 28%

  Sales for period 1$435,000

  Sales for period 2$578,000

  Cost of debt 7. 75%

  Expected return on the market 15%

  Risk-free rate 4. 55%

  Beta 1.05

  Given this information, what is the operating leverage of this division during the time period in question?

  A. 0.8518
  B. 1.1741
  C. 0.9178
  D. The degree of operating leverage for this firm cannot be calculated from the information provided.
  E. 0.1322
  F. 0.98402
  A. 0.8518

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  Explanation

  To calculate the degree of operating leverage, use the following equation: {% change in EBIT/% change in sales}. In this example, the percentage change in EBIT is provided. However, the percentage change in sales must be calculated, and can be found by the following: {[sales in period 2 - sales in period 1]/sales in period 1}. Incorporating the given information into this equation yields a percentage change in sales of 32. 87%. From this point on, the calculation of the DOL is straightforward, and can be found as follows: {% change in EBIT 28%/% change in sales 32. 87%}= 0.8518. In attempt to trick you, the cost of debt, along with the components of the Capital Asset Pricing Model have been provided. None of these figures are relevant in the calculation of the Degree of Operating Leverage.

• Question 2612:

  Which of the following is/are required by AIMR-PPS with regards to calculation of returns?

  I. The return for after-tax composites that hold both taxable and tax-exempt securities should be stated on an equivalent, "pre-tax" basis.

  II. Real Estate must be appraised annually unless client agreements state otherwise.

  III.

  For commingled fund-of-funds structure, segregated Irrs net of trading expenses must be presented.

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

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  Explanation

  The return for after-tax composites that hold both taxable and tax-exempt securities should be stated on an "after-tax" basis and should not be "grossed" up. Real Estate investments must be appraised every three years and the valuations reviewed quarterly unless client agreements state otherwise. For separately managed accounts commingled fund-of-funds structure, cumulative Irrs net of trading expenses must be presented.

• Question 2613:

  Assume you buy a computer for $1,350 and agree to pay for it with 24 payments of $45, beginning next month. What is the size of the final payment needed at month 24 to completely pay off the computer, if the interest rate you are being charged is 16% per year, compounded monthly?

  A. $707. 88
  B. $387. 14
  C. $494. 39
  D. $0.00
  E. $592. 21
  E. $592. 21

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  Explanation

  This question describes a situation often called a balloon payment. On the BAII Plus, press 24 N, 16 divide 12 = I/Y, 1350 PV, 45 +/- PMT, CPT FV. On the HP12C, press 24 n, 16 ENTER 12 divide i, 1350 PV, 45 CHS PMT, FV. The answer is shown as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 2614:

  Consider the following annual growth forecasts for a common stock:

  Growth in years 1-2 = 20% Growth in year 3 = 15% Growth after year 3 = 12%

  Assuming that the last dividend was $1.80 per share, and the required rate of return is 17% per year, what is the value of this common stock?

  A. $22. 27
  B. $25. 34
  C. None of these answers is correct.
  D. $35. 82
  E. $17. 89
  F. $31.92
  C. None of these answers is correct.

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  Explanation

  None of these answers is correct.

  To determine the value of a common stock experiencing temporary supernormal growth, use the following equation:

  {V = {[d0 * (1 + gs)^1] / k} + {[d1 * (1 + gs)^2} + ... {dn * (1 + gs)^n} + {[dn * (1 + gs)^n * (1 + gn] / (k - g)}/ (1 + k)^n}}

  Where: V = the value of common stock at t0, d0 = the dividend at t0, d1 = the dividend at t1, dn = the dividend at tn, gs = the supernormal rate of growth, gn = the normal rate of growth, n = the time period "n", and k = the required rate of

  return.

  In this example, the supernormal growth period is followed by a transitional growth period of one year, during which the growth rate of this stock is expected to grow at 15% annually. This period will follow the two-year supernormal growth

  period, and would be denoted as "g subset t" if we were to rewrite the basic equation listed above. The calculation of the value of this common stock is illustrated as follows:

  {V = {[$1.80 * (1.20)^1] / (1.17)} + {[$1.80 * (1.20)^2] / (1.17)^2} + {[$1.80 * (1.20)^2 * (1.15)^1] / (1.17)^3} + {{[$1.80 * (1.20)^2 * (1.15)^1 * (1.12)^1]/ (0.17 - 0.12)}/ (1.17)^3}

  Which can be deduced to the following:

  {V = [$1.846154 + $1.893491 + $1.861124 + $24. 814983] = $30.415752}

• Question 2615:

  Level ________ verification applies to specific composites.

  A. II
  B. III
  C. I
  E. IV
  A. II

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  Explanation

  Level I verification applies to all firm composites. Level II verification requires a Level I verification at least on the specific composites being verified at Level II. (Note: There are only two levels of verification.)

• Question 2616:

  Which of the following are assumptions of the dividend discount model?

  A. The required rate of return is greater than the growth rate
  B. Earnings will not be negative
  C. Dividends will be paid on stocks
  D. All of these answers
  A. The required rate of return is greater than the growth rate

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  Explanation

  The infinite period Dividend Discount Model has the following assumptions:

  1. Dividends grow at a constant rate

  2. The constant growth rate will continue for an infinite period

  3. The required rate of return (k) is greater than the infinite growth rate (g). If it is not, the model gives meaningless results because the denominator becomes negative.

• Question 2617:

  The management of the portfolio of securities held by an investment company is usually handled by ________.

  A. the board of directors
  B. the CEO or the CFO
  C. a separate investment management company
  D. a group of elected shareholders
  C. a separate investment management company

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  Explanation

  The management of the portfolio of securities held by an investment company is usually handled by a separate investment management company which is hired by the board of directors.

• Question 2618:

  An investment of $100 grows in five years to $205. The investor observes that the annual arithmetic rate of return and the geometric rate of return were the same over this period. The annual arithmetic rate of return must be ________.

  A. 4. 32%
  B. 15. 44%
  C. 17. 84%
  D. 13. 93%
  E. 8.33%
  B. 15. 44%

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  Explanation

  If the annual geometric rate of return is r, then 100 * (1 + r)^5 = 205. This gives r = 15. 44%. Note that the only way the mean will be equal to the geometric mean if every year, the stock experienced a return of 15. 44% per year.

• Question 2619:

  Holding all else equal, an decrease in which of the following will cause an increase in the theoretical growth rate of common stock dividends according to the Growth Rate of Dividends Model?

  I. ROE

  II. Payout ratio

  III.

  Tax rate IV Preferred stock price

  V.

  Discount rate

  VI.

  Retention rate

  A. II, V
  B. None of these answers
  C. II, IV
  D. III, II
  E. I, III, IV
  F. V, VI
  B. None of these answers

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  Explanation

  The equation used to determine the theoretical growth rate of common stock dividends is as follows:

  {Annual growth rate = [ROE * (1 - dividend payout ratio)]}

  As you can see, of the choices listed, only a decrease in the dividend payout ratio will cause an increase in the theoretical growth rate of common stock dividends.

• Question 2620:

  The accrual basis of accounting

  A. does not pertain to revenue recognition-only expense recognition.
  B. recognizes the development of assets and liabilities externally.
  C. is used only for taxes reporting purposes.
  D. begins with the cash basis of accounting and proceeds to make the necessary adjustments.
  E. allocates many transactions that produce cash flows to time periods other than those in which the cash flows occur.
  E. allocates many transactions that produce cash flows to time periods other than those in which the cash flows occur.

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  Explanation

  Accrual accounting principles are the decision rules that state when to recognize the revenue and expense consequences of cash flows and other events.