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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2651:

  The degree of financial leverage is defined as:

  A. the change in EPS for a unit change in EBIT.
  B. the percentage change in EBIT for a 1% change in EPS.
  C. none of these answers.
  D. the percentage change in EBIT for a 1% change in the quantity sold.
  C. none of these answers.

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  Explanation

  The degree of financial leverage is defined as the percentage change in EPS for a 1% change in EBIT.

• Question 2652:

  An analyst has stated that, holding all else constant, an increase in the maturity of a coupon bond will increase its interest rate risk, and that a decrease in the coupon rate of a coupon bond will decrease its interest rate risk. The analyst is correct:

  A. only with respect to the effect of the increase in the maturity
  B. only with respect to the effect of the decrease in the coupon rate
  C. with respect to both the effect of the increase in maturity and the effect of the decrease in the coupon rate
  A. only with respect to the effect of the increase in the maturity

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  Explanation

• Question 2653:

  Smirlee Montero is a fixed income analyst at a small investment firm. She has been studying the subject of "Body Language" in order to gauge the effectiveness of reading into the dispositions of people. Based on her own empirical tests carried out over the past two years involving 64 different subjects, she has concluded that during the meetings with analysts, a senior management official is usually more excited and waves hands quite often when the information like earnings report (which is released a couple of days later) is very favorable. On the other hand, if the earnings are short of expectations, the official tends to be sober and appears more introspective. There are other body signs which she uses to evaluate possible signals about the quality of information that is pending. In a recent meeting with Chronotron, Inc.'s quarterly analyst meeting, she concluded using her technique that Chronotron's earnings are very likely much lower than projected earlier. This information was not actually released in the meeting whose main focus was on the company's plans for the next quarter. In her report, Smirlee presented a detailed analysis of the publicly available information which supported her hunch and wrote, "Based on this and certain other observations, it is my opinion that Chronotron's is not doing as well as we earlier estimated. Therefore, I would recommend selling this stock before the firm releases its earnings numbers." Smirlee has:

  A. violated Standard IV (A.1) - Reasonable Basis and Representations by using a non-conventional and controversial technique.
  B. violated Standard IV (A.2) - Research Reports by failing to distinguishing between fact and opinion.
  C. violated Standard V (A) - Prohibition against use of Material, Non-Public Information.
  D. has not violated any Standards.
  D. has not violated any Standards.

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  Explanation

  There is no evidence that in her report, Smirlee has tried to pass off an opinion as fact. While her new technique is unconventional, using it would not be a violation of Standard IV (A.1) only if used in isolation. Since she has diligently analyzed public information on Chronotron, she cannot be accused of not having a reasonable basis for recommendation. The AIMR Standard of Ethics do not prohibit a use of new techniques but rather encourage tempering them with more orthodox analysis.

• Question 2654:

  Which of the following is true?

  A. GDP = GNP + (income of citizens received for factors of production supplied abroad) - (income paid to foreigners for their contribution to domestic output)
  B. The GDP is always larger than GNP since it includes the output produced by foreign nationals living in the country.
  C. The GNP is always larger than GDP since it includes the income by the country's citizens living abroad.
  D. GNP = GDP + (income of citizens received for factors of production supplied abroad) - (income paid to foreigners for their contribution to domestic output).
  D. GNP = GDP + (income of citizens received for factors of production supplied abroad) - (income paid to foreigners for their contribution to domestic output).

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  Explanation

  GNP measures the productive value generated by the labor and capital owned by the citizens of a country, regardless of whether those citizens and assets reside within the country or out of it. Hence, while calculating GNP, the income generated by foreign nationals residing in the country as well as by assets owned by foreign nationals is excluded. On the other hand, GDP measures the productive activity within the country, regardless of who produces it.

• Question 2655:

  Which of the following is/are true about a normal distribution?

  I. It has only one mode.

  II. It has a positive third moment.

  III.

  It is symmetrical about zero.

  A. III only
  B. I, II and III
  C. II only
  D. I and IV
  E. I only
  F. I and III
  E. I only

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  Explanation

  A normal distribution is symmetrical about the mean, which can be non-zero. It has a zero third moment (zero skewness).

• Question 2656:

  A project's break-even point is 1,235 units when the average sale price per unit is $35 and the average variable cost equals $17. 5 per unit. The fixed costs of the project are closest to ________.

  A. $613
  B. $21,612. 5
  C. none of these answers
  D. $43,225
  B. $21,612. 5

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  Explanation

  The break-even sales revenue equal 1,235*$35 = $43,225. The total variable costs equal $17. 5*1,235 = $21,612. 5. The fixed costs are therefore equal to $43,225 - $21,612. 5 = $21,612. 5.

• Question 2657:

  Given that the correct value of a common stock is $25, the required rate of return on the stock is 15%, and the dividend growth rate is 5%, using the infinite period Dividend Discount Model, what will next period's dividend be?

  A. $2. 28
  B. $2. 79
  C. Not enough information
  D. $2. 50
  E. $3. 16
  D. $2. 50

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  Explanation

  The infinite period Dividend Discount Model postulates that the current value of a common stock is equal to D1 / (k - g), where D1 is next period's dividend, k is the required rate of return, and g is the growth rate of dividends. Rearranging this yields D1 = current value x (k - g). In this question, next period's dividend is equal to 25 x (0.15 - 0.05) = $2. 50.

• Question 2658:

  Holding other things constant, a decrease in a firm's retention rate of earnings will

  A. increase the ROE.
  B. decrease the ROE.
  C. increase the firm's expected growth rate.
  D. decrease the earnings multiplier.
  D. decrease the earnings multiplier.

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  Explanation

  A decrease in a firm's retention rate will decrease its expected growth rate of earnings and dividends. This, in turn, will decrease the earnings multiplier. Changes in a firm's retention rate should not affect its return on equity (ROE).

• Question 2659:

  An asset is estimated to have a total life of 8 years. Its acquisition cost is 16,000 and a salvage value of 4,000. The firm follows the double declining method of depreciation. In the second year, the rate of depreciation for the firm's asset is closest to ________.

  A. 25%
  B. 17%
  C. 9.5%
  D. 12. 5%
  A. 25%

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  Explanation

  In DDM depreciation, depreciation expense = (2/n)*book value. Thus, depreciation rate = 2/n = 2/8 = 25%. Remember that in the later years, DDM has to switch to a different depreciation method to avoid depreciating below the salvage value.

• Question 2660:

  Which of the following are considered when applying generally accepted accounting principles.

  A. When income is recognized as earned.
  B. When expenses and losses accrue.
  C. How assets are measured.
  D. All of these answers are correct.
  E. When liabilities are incurred.
  D. All of these answers are correct.

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  Explanation

  The rules or standards of accounting determine such matters as how assets are measured, when liabilities are incurred, when income is recognized as earned, and when expenses and losses accrue.