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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2721:

  On a very hot summer day, 5 percent of the production employees at Midland States Steel are absent from work. The production employees are to be selected at random for a special in depth study on absenteeism. What is the probability of selecting 10 production employees at random on a hot summer day and finding that none of them are absent?

  A. 0.599
  B. 0.100
  C. 0.002
  D. 0.344
  E. None of these answers
  A. 0.599

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  Explanation

  This is a binomial probability. The probability of getting r successes out of n trials where the probability of success each trial is p and probability of failure each trial is q (where q = 1-p) is given by: n!(p^r)[q^(n-r)]/r!(n-r)!. Here n = 10, r = 0,p =

  0.05 and q = 0.95. Therefore we have 10!(0.05^0)(0.95^10)/0!10! = 0.599.

• Question 2722:

  Which is true of all skewed distributions?

  I. They are is not symmetrical.

  II. Their mean and median are not equal.

  III.

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

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

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  Explanation

  A skewed distribution is not symmetrical and its mean and median are not equal. While a positively skewed distribution is characterized by many small values and a few extreme values, the opposite is true of negatively skewed distributions. So III is false as far as "all skewed distributions" are concerned.

• Question 2723:

  Which of the following statements is most correct?

  A. An increase in the cost of equity capital when a company announces an increase in its dividend per share, would be consistent with the bird-in-the-hand theory.
  B. All of these statements are correct.
  C. The tax preference theory states that, all else equal, investors prefer stocks that pay low dividends because retained earnings can lead to capital gains that are taxed at a lower rate.
  D. A dividend policy that involves paying a consistent percentage of net income is the best policy if the "clientele effect" is correct.
  E. An increase in the stock price when a company decreases its dividend is consistent with the signaling theory.
  C. The tax preference theory states that, all else equal, investors prefer stocks that pay low dividends because retained earnings can lead to capital gains that are taxed at a lower rate.

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  Explanation

  The reasons investors might prefer a low dividend payout to a high payout are:

  1. Long-term capital gains are taxed at a maximum 28% rate, whereas dividend income is taxed at rates up to 39.6%. Obviously, high tax-bracket investors might prefer to have firms plow back earnings into the firm, presumably leading to a higher stock price, and resulting in a lower-taxed capital gain.

  2. Capital gain taxes are not paid until the stock is sold and taxes paid in the future has a lower effective cost than taxes paid today.

  3. If stock is held until one dies, no capital gains tax is due because the cost basis of the stock of the beneficiaries who inherit the stock, is the stock's value on the death day, thus escaping any capital gains tax.

• Question 2724:

  You have recently accepted a one-year employment term by a firm. The firm has given you the option of receiving your salary as a lump sum value of $30,000 at the end of the year or as 12 monthly payments of $2,400 starting one month after you start work. If your relevant discount rate is 2 percent per month, then which salary options would you prefer? (Ignore taxes, risk, and consumption needs.)

  A. Monthly payments, since you do not have to wait so long to receive your money.
  B. Monthly payments, since it has the larger present value.
  C. The lump sum payment, since it has the larger present value.
  D. Either one, since they have the same present value.
  E. The lump sum payment, since it has the larger future value.
  B. Monthly payments, since it has the larger present value.

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  Explanation

  Monthly option PV = $2,400(PVIFA(2%,12)) = $2,400(10.5753) = $25,380.72. Annual option PV = $30,000(PVIF(2%,12)) = $30,000(0.7885) = $23,655.

• Question 2725:

  Which of the following statements clearly conflicts with the recommended procedures for compliance presented in AIMR's Standards of Practice Handbook?

  A. Investment recommendations may be changed by an analyst without prior approval of a supervisory analyst.
  B. Prior approval must be obtained for the personal investment transactions of all employees.
  C. For confidentiality reasons, personal transactions should not be compared with those of clients or the employer unless requested by regulatory organizations.
  D. Personal transactions should be defined as including transactions in securities owned by the employee and member of his or her immediate family and transactions involving securities in which the employee has beneficial interest.
  C. For confidentiality reasons, personal transactions should not be compared with those of clients or the employer unless requested by regulatory organizations.

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  Explanation

  This question deals with the compliance procedures relating to personal investments of members. Employees should compare personal transactions of employees with those of clients on a regular basis, regardless of the existence of a regulatory organization. Such comparisons ensure that members' personal trades do not conflict with their duty to their clients. All the other statements do not conflict with the procedures in the Handbook.

• Question 2726:

  When the weighted average method is used, ending inventory units are priced at the

  A. none of these answers is correct
  B. earliest price
  C. average price
  D. lower of cost or market
  C. average price

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  Explanation

  Under the weighted average method, inventory is priced at the average cost of the goods available for sale (Beginning inventory plus purchases during the period).

• Question 2727:

  Cash outflows for payment of cash dividends is an example of:

  A. cash flows from financing activities
  B. cash flows from investing activities
  C. cash flows from noncash investing and financing activities
  D. cash flows from operating activities
  A. cash flows from financing activities

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  Explanation

  Providing stockholders with a return on their investment in the form of a cash dividend is a financing activity.

• Question 2728:

  Donald McKay, CFA, is analyzing a client's fixed income portfolio. As of the end of the last quarter, the portfolio had a market value of $7,545,000 and a portfolio duration of 6. 24. McKay is predicting that the yield for ali of the securities in the portfolio will decline by 25 basis points next quarter. Which of the following statements regarding the portfolio's performance next quarter is most accurate?

  A. For the expected change in portfolio yield next quarter, the market value of the portfolio will change by approximately 6. 24%.
  B. If the yield curve has a 50 basis point downward parallel shift next quarter, the portfolio will increase in value by approximately $235,404.
  C. The portfolio's ending value after the expected decline in yields will be approximately $7,427,298.
  B. If the yield curve has a 50 basis point downward parallel shift next quarter, the portfolio will increase in value by approximately $235,404.

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  Explanation

• Question 2729:

  Sparten, Inc., a plumbing contractor, received a check for $3,000 on June 29 for services to be performed in the following fiscal month. During the July accounting period, Sparten completed all but $500 of the job. What adjusting entry needs to be made at the end of July?

  A. increase Unearned revenue and decrease cash for $500
  B. debit Unearned Revenue and credit Revenue for $2,500
  C. increase cash and revenue for $3,000
  D. decrease accounts receivable and increase revenue for $2,500
  B. debit Unearned Revenue and credit Revenue for $2,500

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  Explanation

  When the check for was received on June 30, a liability was established for $3,000 because revenue could not be recognized until it was earned. During July, $2,500 of revenue was earned and should be recognized, along with a reduction (debit) to the Unearned Revenue account.

• Question 2730:

  Which of the following are challenges to technical analysis? Choose the best answer.

  I.The majority of studies have concluded that securities prices do not move in trends.

  II. Technical analysis assumes that supply-demand fluctuations lead to changes in securities prices.

  III. Technical analysis is heavily reliant on subjective judgement.

  IV.

  Technical analysis assumes that supply and demand are partially influenced by irrational factors, and that supply and demand fluctuations are the only determinant of shifts in securities prices.

  V.

  The majority of studies have supported the weak-form Efficient Market Hypothesis. VI. The standard rules that signal investment decisions can change over time.

  VII.

  Technical analysis is heavily reliant on financial statements.

  A. I, II, III, IV, V, VI, VII
  B. None of these choices represents the best possible answer.
  C. I, III, IV, V, VII
  D. II, III, IV, V, VI, VII
  E. I, II, III, V, VI
  B. None of these choices represents the best possible answer.

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  Explanation

  None of these answers are completely correct. Of the choices listed, only II and VII are incorrect. While II appears correct, it is not. In fact, both fundamental and technical analyses recognize the importance of supply and demand fluctuations. The difference is that technical analysis assumes that supply and demand are influenced by both rational and irrational factors, whereas the EMH assumes that investors are rational. Further, technical analysis assumes that supply and demand fluctuations are the sole cause of shifts in securities prices.