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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2681:

  Each of the following are conditions that must be met if revenue is going to be recognized at the time of sale except

  A. seller has no significant obligations for future performance to directly effect resale of product.
  B. product return periods are less than or equal to 30 days from the time of sale.
  C. price is substantially fixed or determinable at the sale date.
  D. buyer pays the seller or is obligated to pay the seller (not contingent on resale).
  B. product return periods are less than or equal to 30 days from the time of sale.

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  Explanation

  Revenue can be recognized at the time of sale as long as the product returns are reasonably estimated as well as several other conditions existing. There is no definitive number of days that make the recognition possible.

• Question 2682:

  Standard ________ pertains to fair dealing with customers and clients.

  A. III (B)
  B. IV (B.3)
  C. IV (A)
  D. I (D)
  E. None of these answers
  B. IV (B.3)

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  Explanation

  Standard IV (B.3) states: "Members shall deal fairly and objectively with all clients and prospects when disseminating investment recommendations, disseminating material changes in prior investment recommendations and taking investment action."

• Question 2683:

  A(n) _____________ return requirements must be balanced between the need for current income and the need for the long-term protection of capital.

  A. pension fund's
  B. life insurance company's
  C. endowment fund's
  D. investment company's
  C. endowment fund's

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  Explanation

• Question 2684:

  Which of the following is/are true under accrual accounting?

  I. Revenues are recognized when goods are delivered.

  II. Revenues are recognized when cash is received.

  III. Matching principle accounting is followed under accrual accounting.

  IV.

  Cash outflows determine expense recognition.

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

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  Explanation

  Accrual accounting follows the Matching Principle, which requires that revenues and gains be recognized when earned and expenses and losses be recognized when incurred. Hence, revenue recognition is completely separate from cash flows. In the sales process, the earnings process is completed when goods are delivered and that's when revenue is recognized under accrual accounting.

• Question 2685:

  A portfolio manager with Old School Securities is trying to determine whether shares of Ludicrous Telecom are undervalued. In his analysis, this portfolio manager has determined that the firm's current dividend of $0.40 per share is anticipated to grow 16% annually. Additionally, this portfolio manager has forecasted that she will be able to sell shares of Ludicrous Telecom for $27 per share in four years. Assuming a 18.75% per year required rate of return, what is the value of Ludicrous Telecom's shares?

  A. $15. 09
  B. $17. 34
  C. $19.19
  D. None of these answers is correct.
  E. $14. 10
  A. $15. 09

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  Explanation

  The Multiple Holding Period form of the Dividend Discount Model takes the following form: {V = {[d1 / (1 + k)] + [d2 / (1 + k)^2] + ... .[dn / (1 + k)^n] + [Pn / (1 + k)^n]} Where: V = the price of the common stock at t0, d1 = the annual dividend at t1 (this is found by multiplying the annual dividend at t0 by (1 + the anticipated growth rate), d2 = the annual dividend at t2 (this is found by multiplying the dividend at t1 by (1 + the anticipated growth rate), k = the required rate of return, n = period "n", and Pn = the sale price of the common stock at time "n".

  In this example, time "n" is the fourth year, as this is the end horizon for this investor's holding period. Had the investor in this example forecasted selling the shares at the end of the 10th year, then "n" would be the tenth year.

  Now that the formality of expressing the equation for this form of the DDM has been carried through, we can move toward a calculation of the value of this common stock. In this example, all of the necessary information has been provided,

  and the calculation of the value of this retail stock is as follows:

  {V = [($0.40 * 1.16) / (1 + 0.1875)^1] + [($0.464* 1.16) / (1 + 0.1875)^2] + [($0.53824 * 1.16) / (1 + 0.1875)^3] + [($0.624358 * 1.16) / (1 + 0.1875)^4] + [$27 / (1 + 1.1875)^4]}

  Which can be further broker down into the following:

  {V = [$0.390737 + $0.381688 + $0.372849 + $0.364214 + $13. 577796] = $15. 09}

• Question 2686:

  The population of Tunisia is 100 million; 5 million are unemployed and 90 million hold jobs. The employment rate in Tunisia is

  A. 90 percent.
  B. 5 percent.
  C. 95 percent.
  D. 85 percent.
  A. 90 percent.

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  Explanation

  The employment rate is equal to the number employed/total population or 90 million/100 million = 90%.

• Question 2687:

  Scenario analysis ignores:

  A. the range of likely values that key variables can take.
  B. changes in some of the key variables.
  C. effect on the NPV of changes in project variables.
  D. none of these answers.
  D. none of these answers.

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  Explanation

  It is the Sensitivity Analysis that ignores the range of likely values that key variables can take. This is rectified using Scenario Analysis.

• Question 2688:

  A Treasury bond dealer observes the following Treasury spot rates from the spot rate curve: 1-year 7. 40%, 2-year 7. 00%, and 3-year 6. 3%. The bond dealer also observes that the market price of a 3-year 8% coupon, 100 par value bond is $103. 95. Based on this information, the dealer should:

  A. buy the 8% coupon bond in the open market, strip it, and sell the pieces.
  B. sell the 8% coupon bond short, and buy the component cash flow strips with the proceeds.
  C. do nothing since the 8% bond is selling for its arbitrage-free price.
  A. buy the 8% coupon bond in the open market, strip it, and sell the pieces.

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  Explanation

• Question 2689:

  A diffusion index with a value of over 70 is considered by technical analysts to be

  A. not particularly bullish or bearish.
  B. a sign of caution.
  C. a sign of an approaching trough.
  D. a bullish sign.
  B. a sign of caution.

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  Explanation

  The diffusion index is an alternative specification of advance-decline series, and is used as an indicator of the direction of the market. If the index reaches up to levels of 56 to 60, the market is considered overbought. If it comes down to levels of 40 to 44, the market is considered over oversold.

• Question 2690:

  The construction of cash flow statement using the indirect method requires which of the following?

  I. Income Statement.

  II. Balance Sheet.

  III. Statement of Retained Earnings.

  IV.

  Statement of Shareholders' Equity.

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

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  Explanation

  In the indirect method of construction of the cash flow statement, you start with the net income and start adding back non-cash expenses, adjusting for tax effects. In addition, one needs to look at changes in assets and liabilities accounts to back out investing and financing cash flows. Thus, you need both income statement and the balance sheet for the indirect method of cash flow construction.