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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2621:

  If the Fed wanted a more expansionary monetary policy, which of the following would be most appropriate?

  A. reduce taxes
  B. increase government expenditures
  C. buy government bonds from the public
  D. raise the discount rate
  C. buy government bonds from the public

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  Explanation

  To expand the money supply the Fed may buy government bonds from the public. This action injects money into the economy because individuals who formerly held U.S. security notes now hold money balances.

• Question 2622:

  If AIMR Members, CFA Charterholders and Candidates do not follow the AIMR Performance Presentation Standards and they make material misrepresentations, they will be in violation of what Standard of Professional Conduct?

  A. Standard V (A)
  B. None of these answers. The PPS are voluntary, thus failure to follow them will result in no violation of the Standards of Professional Conduct.
  C. Standard I
  D. Standard V (B)
  D. Standard V (B)

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  Explanation

  Although the AIMR-PPS are not explicitly incorporated in the AIMR Standards of Professional Conduct, they should be relied on to help ensure no misrepresentation of performance occurs. Misrepresentation results in violation of Standard V

  (B) - Performance Presentation.

• Question 2623:

  Which is true of positively skewed distributions?

  I. They are not symmetrical.

  II. Their mean is larger than their median.

  III.

  They are characterized by many small values and a few extreme values.

  A. I and II
  B. I and III
  C. None of these answers is correct.
  D. II and III
  C. None of these answers is correct.

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  Explanation

  All are true of positively skewed distributions, so the answer is I, II, and III: None of the above is the correct choice.

• Question 2624:

  If a firm adheres strictly to the residual dividend policy, a sale of new common stock by the company would suggest that ________.

  A. the dividend payout ratio is decreasing
  B. the dividend payout ratio has remained constant
  C. the dollar amount of investments has decreased
  D. the dividend payout ratio is increasing
  E. no dividends were paid for the year
  E. no dividends were paid for the year

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  Explanation

  The residual dividend model is a model in which the dividend paid is set equal to the actual earnings minus the amount of retained earnings necessary to finance the firm's optimal capital budget. A firm follows 4 steps when using this model:

  1. The optimal capital budget is determined.

  2. The amount of equity needed to finance that budget, given its target capital structure, is determined.

  3. Retained earnings are used to meet equity requirements to the extent possible.

  4. Dividends are paid only if more earnings are available than are needed to support the optimal capital budget.

  As long as the firm finances with the optimal mix of debt and equity, and provided it uses only internally generated equity (retained earnings), then the marginal cost of each new dollar of capital will be minimized. Internally generated equity is

  available for financing some new investment, but beyond that amount, the firm must finance through more expensive common stock. At this point where new stock must be sold, the cost of equity and the marginal cost of capital, increases.

• Question 2625:

  The Global Advertising Company had net income after interest but before taxes of $40,000 this year. The marginal tax rate is 40 percent, and the dividend payout ratio is 30 percent. The company can raise debt at a 12 percent interest rate. The last dividend paid by Global was $0.90. Global's common stock is selling for $8.59 per share, and its expected growth rate in earnings and dividends is 5 percent. If Global issues new common stock, the flotation cost incurred will be 10 percent. Global plans to finance all capital expenditures with 30 percent debt and 70 percent equity. What is Global's cost of retained earnings?

  A. 10.33%
  B. 9.66%
  C. 12. 22%
  D. 17. 22%
  E. 16. 00%
  E. 16. 00%

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  Explanation

  k(s) (component cost of retained earnings) = $.945/$8.59 + 0.05 = 0.1600 = 16. 00%.

• Question 2626:

  A price-linked derivative security pays $300 if the oil price over the next year increases by more than 5%, an event that can happen with a 60% probability. Otherwise, it pays $50. If the expected return on the security is 15%, how much does the security cost?

  A. $174
  B. $180
  C. $168
  D. $191
  A. $174

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  Explanation

  The expected payoff on the security equals 0.6 * 300 + 0.4 * 50 = 200. Since the expected return is 15%, the security must cost 200/1.15 = $173. 9

• Question 2627:

  Mikal Cosce uses technical analysis to determine his trading behavior. Cosce would be least likely to agree with which of the following statements?

  A. He supports the weak form of the efficient market hypothesis.
  B. Stock prices move in trends, and these trends persist.
  C. Technical analysis tells him when to buy.
  D. He does not have to rely on accounting information.
  A. He supports the weak form of the efficient market hypothesis.

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  Explanation

  The weak form of the efficient market hypothesis (EMH) refutes technical trading. The tests for the weak form of the EMH indicate that after incorporating trading costs, simple trading rules cannot generate positive, consistent, abnormal returns. The other statements are true.

• Question 2628:

  For an upcoming sight-seeing visit to India, a U.S. resident recently purchased a hundred thousand Indian Rupees. His action

  A. created a credit balance in the U.S. BOP account.
  B. created a debit balance in the U.S. BOP account.
  C. created a deficit in the U.S. trade account.
  D. none of these answers.
  B. created a debit balance in the U.S. BOP account.

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  Explanation

  This is a point of convention where much confusion exists. Before you answer it, you should remember two things:

  In International Finance, a country's reserve of foreign currency and foreign- produced goods is treated as an asset.

  In Accounting, by convention, increases in assets are recorded as "debit" entries and reductions are treated as "credit" entries.

  In the above example, there is an inflow of Indian Rupees and is hence recorded as a debit to the U.S. BOP account.

  Of course, it is also quite important to remember that the BOP account must balance out, just as surely as you must have debits = credits in accounting. The subtle part in BOP accounting is to recognize the offsetting credit entry that arises.

  Consider how this happens in the above example:

  The dollars used to buy the Indian rupees represent a liability for the U.S. This debt will be extinguished during the year through a supply of goods by U.S. residents in the form of exports or end up as a recognition of liability on the Official

  Reserve account when the accounts are balanced at the end of an accounting period (quarter end or year end). When this happens, the offsetting credit entry shows up on the accounts and the national balance sheet balances out. Note that

  exports are thus treated as credits and imports are treated as debits on the BOP account.

  In summary,

  1. Any inflow of domestic currency represents a credit and any outflow of domestic currency represents a debit on the BOP account.

  2. Any inflow of foreign currency represents a debit and any outflow of foreign currency represents a credit on the BOP account.

• Question 2629:

  The following is true about the price earnings ratio

  A. all of these answers are correct
  B. the ratio is calculated based on the expected earnings per share for the next period
  C. stocks have low PE ratios if they are less than five to eight and are considered underpriced
  D. it is the ratio between the company's current market value and its earnings per share
  A. all of these answers are correct

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  Explanation

  PE ratio is calculated based on expected earnings per share and a ratio of less than 5 to 8 makes a stock appear underpriced.

• Question 2630:

  Investments in available-for-sale securities should be valued on the balance sheet at ________.

  A. amortized cost
  B. lower of cost or market for the portfolio
  C. lower of cost or market for individual securities
  D. fair value
  E. acquisition cost
  D. fair value

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  Explanation

  Available-for-sale securities are investments in debt securities that are not classified as held-to- maturity or trading securities and in equity securities with readily determinable fair values that are not classified as trading securities. They are measured at fair value on the balance sheet.