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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 261:

  To fulfill the basic provisions of Standard IV (B.2), a member should ________.

  A. stay free of all conflicts of interest
  B. develop an investment policy statement for each client
  C. discuss the proxy voting policy with management
  D. disclose to clients, all additional compensation agreements
  E. disclose all soft dollar arrangements
  B. develop an investment policy statement for each client

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  Explanation

  In formulating an investment policy for the client, the member should take into consideration client identification, investor objectives, and investor constraints.

• Question 262:

  What is the value of a bond with coupon payments of $150 every six months, a final payment of $5,500 in 12 years, and a risk-premium of 8%?

  A. Not enough information
  B. $3,864
  C. $2,239
  D. $3,046
  E. $1,240
  A. Not enough information

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  Explanation

  In order to take the present value of the coupon and principal payments, one must know the required rate of return on the bond. The required rate of return is equal to the risk-free rate plus the risk premium. The risk-free rate is not given, so there is not enough information to answer the question.

• Question 263:

  According to Standard IV (B.4), Priority of Transactions: "Transactions for clients and employers shall have priority over transactions in securities or other investments of which a member is the ________ so that such personal transactions do not operate adversely to their clients' or employer's interests."

  A. material agent
  B. primary decision maker
  C. none of these answers
  D. proxy voter
  E. beneficial owner
  F. principal broker
  G. sole charterholder
  H. registered representative
  E. beneficial owner

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  Explanation

  Standard IV (B.4) deals with the Priority of Transactions. Under this standard, transactions for clients and employers shall have priority over transactions in securities or other investments of which a member is the beneficial owner so that such personal transactions do not operate adversely to their clients' or employer's interests. If members make a recommendation regarding the purchase or sale of an investment, they shall give their clients and employer adequate opportunity to act on the recommendation before acting on their own behalf.

• Question 264:

  Which of the following statements is most correct?

  A. If a company does a 2-for-1 stock split, its stock price will roughly double.
  B. An open-market dividend reinvestment plan is likely to be attractive to companies that are looking to issue additional shares of common stock.
  C. All of these answers are correct.
  D. None of the answers are correct.
  E. Stock repurchases have the effect of reducing financial leverage.
  D. None of the answers are correct.

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  Explanation

  A new stock type of DRIP would result in raising new capital for the firm. Stock repurchases increase financial leverage. In a 2-for-1 stock split, the stock price will be halved.

• Question 265:

  A firm's tax rate is 30%. If the beginning inventory was overstated by 50, the purchases understated by 30 and the ending inventory overstated by 10, the income is ________.

  A. overstated by 12
  B. understated by 10
  C. overstated by 21
  D. understated by 7
  D. understated by 7

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  Explanation

  Ending inventory = beginning inventory + Purchases - COGS Hence, in this case, COGS is overstated by 50 + (-30) - 10 = 10. Therefore, income is understated by 10*(1-tax rate) = 7. It should be remembered that implicit in the use of the above inventory equation is the assumption that there have been no write-downs or write-ups in the inventory.

• Question 266:

  Grant Grocers is considering the following investment projects:

  Project Size of Project IRR of Project

  V 1.0 million12. 0%

  W 1.2 million11.5%

  X 1.2 million11.0%

  Y 1.2 million10.5%

  Z 1.0 million10.0%

  The company has a target capital structure, which is 50 percent debt and 50 percent equity. The after- tax cost of debt is 8 percent. The cost of retained earnings is estimated to be 13. 5 percent. The cost of equity is estimated to be 14. 5

  percent if the company issues new common stock. The company's net income is $2. 5 million. If the company follows a residual dividend policy, what will be its payout ratio?

  A. 66%
  B. 12%
  C. 32%
  D. 54%
  E. 100%
  C. 32%

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  Explanation

  The company's WACC (provided no new equity is issued) is 8%(0.5) + 13. 5%(0.5) = 10.75%. Comparing the WACC with the project IRRs reveals that the company will undertake projects V, W, and X. Total financing costs for these projects is $3,400,000. Of this amount, 0.5($3,400,000) = $1,700,000 will be financed from retained earnings. Thus, $2,500,000 - $1,700,000 = $800,000 will be available for dividends. The payout ratio is then $800,000/$2,500,000 = 32%.

• Question 267:

  Which of the following statements about relative strength ratios is correct?

  A. In an increasing market, a stock price has to increase faster than the general market for its relative strength ratio to increase. Relative strength ratios, however, do not work during stagnant or declining markets.
  B. In an increasing market, a stock price has to increase faster than the general market for its relative strength ratio to increase. In a declining market, a stock price only has to increase in order for that ratio to increase.
  C. A high relative strength index that has not changed much over time would be interpreted as a bullish sign by technical analysts. A high ratio value that has started declining would be viewed with caution, however.
  D. In an increasing market, a stock price has to increase faster than the general market for its relative strength ratio to increase. In a declining market, a stock price only has to decline slower than the general market in order for that ratio to increase.
  D. In an increasing market, a stock price has to increase faster than the general market for its relative strength ratio to increase. In a declining market, a stock price only has to decline slower than the general market in order for that ratio to increase.

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  Explanation

  Technical analysts believe that a stock or industry that is outperforming the market will continue to do so. Relative strength ratios are computed to find such trends. The ratios are equal to the price of the stock, or stocks in the industry group, relative to the value of some stock market series. If the ratio increases over time, the stock or industry has beenoutperforming the market.

• Question 268:

  Consider two options, X and Y. Option X has a strike price of S40 and is selling in the marketplace for $4. Option Y has a strike price of $32 and is selling in the market place for $3. The underlying assets for the options, Stock X and Stock Y, have a current market price of $43 and $29, respectively. Which of the following are most likely TRUE about Option X and Option Y?

  A. Option X is an expiring call, and option Y is an in-the-money put.
  B. Option X is an in-the-money put, and option Y is an expiring call.
  C. Option X is an in-the-money call, and option Y is an expiring put.
  C. Option X is an in-the-money call, and option Y is an expiring put.

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  Explanation

• Question 269:

  Which of the following factors will cause country A's currency to appreciate relative to the currency of country B, all else equal?

  I. A has higher income growth.

  II. A has higher inflation.

  III.

  B has higher real interest rate.

  A. II and III
  B. None of them
  C. I, II and III
  D. I only
  E. II only
  F. III only
  G. I and III
  B. None of them

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  Explanation

  A country's currency will appreciate relative to those of its trading partners if it has lower income growth (which will cause the increase in imports to lag behind the increase in exports), has a lower inflation rate or offers higher real interest rates.

• Question 270:

  A firm has just acquired a long-term asset with a useful life of 5 years. Its acquisition cost was $65,000 and its salvage value is estimated at $10,000. If the firm uses straight-line depreciation method, what's the depreciation expense recognized in Year 3?

  A. $10,600
  B. $14,500
  C. $11,000
  D. $13,000
  C. $11,000

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  Explanation

  In Straight-line method, depreciation is constant at (1/n)*(acquisition cost - salvage value). In this case, depreciation = (1/5)*(65,000-10,000)=$11,000.