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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2661:

  The following data are available for a firm for a given year:

  Net Sales 21,896 Sales and marketing expenses 4,346 Administrative expenses 2,143 COGS 10,084 Depreciation 967 Interest expense 573 Tax rate 35% Dividends paid 3,445 Preferred Dividends 897 Average total equity 37,432 Average common equity 26,782 Average total liabilities 18,583

  In the above example, the firm's net profit margin equals ________.

  A. 0.23
  B. 0.17
  C. 0.20
  D. 0.11
  D. 0.11

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  Explanation

  Net Profit Margin = Net Income/Net Sales Net Income = Earnings after depreciation, interest expense and taxes

  = (21,896 - 4,346 - 2,143 - 10,084 - 967 - 573)*(1 - 0.35) = 2,459.

  Therefore, Net Profit Margin = 2,459/21,896 = 0.11.

• Question 2662:

  Arditti manages the pension plan for a publicly traded firm, Eros Computers and in this capacity, has the right to vote 0.5% of the common shares outstanding. Recently, Eros wanted to expand its production operations into Latin America and the board had decided to put the matter for open vote from shareholders. Arditti was on vacation in Fiji at the time and when she was informed about the vote, instructed that the portfolio proxy votes be voted along the same lines as that favored by the senior management. Arditti herself has not studied the merits of the proposed expansion plan but has complete faith in the senior management of Eros, which has always proven to be conscientious and prudent. Arditti has

  I. violated Standard IV (B.1) - Fiduciary Duties by voting the proxy shares in an indiscriminate manner.

  II. can be held liable for failing in her duties under ERISA.

  III.

  violated Standard II (B) - Professional Misconduct by behaving in an unprofessional manner.

  A. I and II
  B. I, II and III
  C. I only
  D. II and III only
  A. I and II

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  Explanation

  Corporate pension plan managers are governed by ERISA (Employee Retirement Security Act, 1974). One of the fiduciary duties expected under these guidelines is the voting of proxy shares. A fiduciary who fails to vote the proxy votes, votes them without analysis, or votes them blindly with the management on non-routine decisions will be in violation of ERISA. They can be held liable for trust violation unless there are explicit provisions in the plan which preclude the manager from voting. Note, however, that Arditti's voting does not constitute professional misconduct. Standard II (B) - Professional Misconduct - and Standard IV (B.1) - Fiduciary Duties.

• Question 2663:

  Clair Boschart is preparing for her CFA study group's discussion of the security market line (SML). She asks her co-worker, a fellow CFA candidate, to review her summary of points. Which of the following statements does the co-worker identify as INCORRECT? If:

  A. risk perception increases, the SML will rotate counterclockwise.
  B. inflation expectations increase, the SML will experience an upward parallel shift.
  C. economic growth decreases, the SML will experience an upward parallel shift.
  D. the capital markets tighten, the SML will experience an upward parallel shift.
  C. economic growth decreases, the SML will experience an upward parallel shift.

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  Explanation

  If economic growth decreases, the SML will experience a downward parallel shift. Investors who supply capital demand a lower rate.

• Question 2664:

  Under a system of fixed exchange rates, which of the following will most likely increase a balance of payments deficit?

  A. an increase in foreign-aid grants
  B. an increase in foreign-aid grants and expansionary monetary policy, which will drive prices up and interest rates down
  C. expansionary monetary policy, which will drive prices up and interest rates down
  D. a reduction in income from investments abroad
  E. restrictive monetary policy, which will keep prices down and interest rates up
  C. expansionary monetary policy, which will drive prices up and interest rates down

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  Explanation

  Expansionary monetary policy will create inflation and cause interest rates to fall. Both of these consequences will cause the demand for U.S. exports and assets to fall which will increase the balance of payments deficit.

• Question 2665:

  A preferred stock has a $100 par value and a dividend payout of $8 per year. What is the value of the preferred stock?

  A. $102. 61
  B. not enough information to calculate it
  C. $89.65
  D. $93. 24
  B. not enough information to calculate it

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  Explanation

  The missing information is the required rate of return in order to discount the dividend payout.

• Question 2666:

  Profit margin is a ratio that:

  A. shows the return on net sales
  B. is calculated as net sales divided by operating expenses
  C. yields the company's financial position at a point in time
  D. compares total assets to net sales
  A. shows the return on net sales

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  Explanation

  Profit margin, also called return on net sales, is calculated by dividing net income by net sales. This ratio measures the average portion of each dollar of revenue that ends up as profit.

• Question 2667:

  Which of the following statements about the investment life cycle is FALSE?

  A. In general, a recent college graduate working at her first job is in the accumulation phase, has a long time horizon, and should invest in high-risk securities to earn above average nominal returns.
  B. A working couple both in the midpoint of their careers has a fairly long time horizon and is beginning to move to investments with moderate risk to provide asset protection.
  C. A retired financial planner in the spending phase is most concerned with estate planning and tax minimization.
  D. Risk capacity generally declines though the investment life cycle.
  C. A retired financial planner in the spending phase is most concerned with estate planning and tax minimization.

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  Explanation

  The gifting state is associated with estate planning and tax minimization. The spending phase is associated with protection for assets. Although these two states usually run concurrently, the life cycle distinguishes them in that the gifting

  phase is concerned with giving away assets while in the spending phase, there is still some accumulation from low-risk investments.

  The other choices are true.

• Question 2668:

  The common stock of Blooth, Incorporated currently pays a $0.35 per share dividend, and this dividend is anticipated to grow 13% annually. Assuming that investors require a 16% per year rate of return on their investment, what is the value of this common stock?

  A. The answer cannot be determined from the information provided.
  B. $13. 18
  C. $19.01
  D. None of these answers is correct.
  E. $24. 72
  F. $16. 83
  B. $13. 18

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  Explanation

  To determine the value of this common stock using the Infinite Period Dividend Discount Model, the following equation is used:

  {P0 = [D1 / (k - g)]}

  Where: P0 = the price of the common stock at t0, D1 = the annual dividend at t1 (this is found by multiplying the dividend at t0 by (1 + expected growth rate), k = the required rate of return, And g = the anticipated growth rate.

  In this equation, all of the necessary information has been provided, and the calculation of the price of this common stock is as follows:

  {P0 = [(0.35 * 1.13) / (0.16 - 0.13)] = $13. 18.

  While the Infinite Period DDM is a useful tool, it frequently inappropriate for valuation purposes because of its generous assumptions. Specifically, the Infinite Period DDM assumes that dividends will grow at a steady rate indefinitely, and that

  this rate is both known and measurable. For most common stocks, the use of the Infinite Period DDM will produce a measure of value that is skewed from objective reality. Nonetheless, this valuation model is frequently cited and represents a powerful tool within specified parameters.

• Question 2669:

  Which of the following is/are true about the definition of "total firm assets" where PPS are concerned?

  I. Total assets include non-discretionary as well as discretionary assets.

  II. Unless the firm actually manages the assets underlying investment strategies, they are not included in the definition of total assets.

  III.

  Assets assigned to subadvisors which are not directly under the firm's management should not be included as part of "total assets."

  A. I, II and III
  B. I and III only
  C. II and III only
  D. I and II only
  A. I, II and III

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  Explanation

• Question 2670:

  If the underlying theory suggests that the value of an estimated variable is greater than a particular number, it is appropriate to use:

  A. either a right-tailed or left-tailed test.
  B. a two-tailed test.
  C. none of these answers.
  D. a right-tailed test.
  E. a left-tailed test.
  D. a right-tailed test.

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  Explanation

  When an observation is made and we see a value greater than the threshold suggested by the theory, we would like to known the probability of getting the larger value due simply to chance rather than to the event being driven by the theory. For this, we need to known the right-tail probabilities under the null hypothesis.