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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2741:

  As the size of the sample increases, what happens to the shape of the sampling mean?

  A. Negatively skewed
  B. Cannot be predicted in advance
  C. Positively skewed
  D. None of these answers
  E. Approaches a normal distribution
  E. Approaches a normal distribution

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  Explanation

  The central limit theorem states that as the sample size gets larger, the sampling distribution of the sample means becomes approximately normal.

• Question 2742:

  The amount by which a plant asset depreciated is classified as

  A. a liability
  B. an asset
  C. an expense
  D. revenue
  C. an expense

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  Explanation

  Depreciation is the periodic allocation of the cost of a tangible, long-term asset over its estimated useful life, and therefore a period expense.

• Question 2743:

  In year 0, $10 could purchase a certain basket of goods. In year 20, the identical basket of goods cost $36. What was the average annualized inflation rate during this period?

  A. 4. 51%
  B. 7. 88%
  C. 12. 21%
  D. 30.00%
  E. 6. 61%
  E. 6. 61%

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  Explanation

  The calculation is as follows: (36/10)^(1/20)-1=0.0661

• Question 2744:

  The government decides to change its fiscal stance by raising levels of general taxation. What layer of the top-down equity valuation would the change impact the most?

  A. It impacts all steps equally.
  B. General economic forecast.
  C. Security selection.
  D. Projected economic outlook for the industry.
  B. General economic forecast.

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  Explanation

  Government economic activity primarily impacts the first stage of the top down approach.

• Question 2745:

  David's gasoline station offers 4 cents off per gallon if the customer pays in cash and does not use a credit card. Past evidence indicates that 40% of all customers pay in cash. During a one-hour period twenty-five customers buy gasoline at this station. What is the probability that at least ten pay in cash?

  A. None of these answers
  B. .575
  C. .425
  D. .416
  E. .586
  B. .575

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  Explanation

  This is a binomial distribution: n!(p^r)(q^(n-r))/r!(n-r)!. n = 25, r = 10, p = 0.4 q = 0.6

  P(10) = 25!(0.4^10)(0.6^15)/10!15! = 0.1612 P(11) = 25!(0.4^11)(0.6^14)/11!14! = 0.1465 P(12) = 25!(0.4^12)(0.6^13)/12!13! = 0.1140 P(13) = 25!(0.4^13)(0.6^12)/13!12! = 0.0760 P(14) = 25!(0.4^14)(0.6^11)/14!11! = 0.0434 P(15) = 25!(0.4^15)(0.6^10)/15!10! = 0.0212 P(16) = 25!(0.4^16)(0.6^9)/16!9! = 0.0088 P(17) = 25!(0.4^17)(0.6^8)/17!8! = 0.0031

  Summing up we get close to 0.574.

  We can continue until r = 25 but the probability gets smaller and converges to 0.575.

• Question 2746:

  ABC (a large manufacturer of farm equipment) is a stable company reporting the following financial information:

  Earnings per share $1.50 Dividends per share $0.50 Net Income $12 million Equity $50 million

  Given the above information, calculate the company's expected dividend growth rate.

  A. 8%
  B. 20%
  C. 33%
  D. 16%
  E. 80%
  F. 1.6%
  D. 16%

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  Explanation

  The expected dividend growth rate = (Retention Rate) x (Return on Equity). Retention Rate = 1 - Payout Rate. Return on Equity = NI/E. Thus in this case the expected dividend growth rate = 1 - (.5/1.5) x ($12 million/$50 million) = (1 - .33) x (.24) = .16 or 16%.

• Question 2747:

  An economist with Smith, Kleen and Beetchnutty Institutional Brokerage has been examining a stock market series and is trying to determine the anticipated rate of return for the series. In her research, this economist has determined the following information:

  Anticipated ending value: 11,800 Expected dividends during the period: $521 Observed beginning value: 10,050.14 Required rate of return: 17. 50%

  Using this information, what is the anticipated rate of return for this stock market series? (Assume a oneyear holding period).

  A. 19.24%
  B. None of these answers is correct.
  C. 12. 23%
  D. 24. 41%
  E. 22. 60%
  E. 22. 60%

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  Explanation

  To calculate the expected rate of return for a stock market series, the following information must be known:

  The beginning value for the series, the anticipated ending value for the series, and the amount of any dividends and/or distributions during the period.

  Once this information has been determined, the expected return on a stock market index can be found by employing the following equation: {E(R) = [(EV - BV + Div) / BV]}. Where: E(R) = the expected return on the stock market series, EV = the anticipated ending value for the series BV = the observed beginning value for the series, and Div = the amount of any dividends paid during the period.

  In this example, all of the necessary information has been provided and the calculation of the expected return on this stock market series is found as follows: {E(R) = [$11,800 - $10,050.14 + $521]/10,050} = 22. 60%. This figure is significantly higher than the required rate of return. Assuming that the anticipated ending value and expected dividends prove accurate, investment in this stock market series is likely advisable.

• Question 2748:

  Which of the following is not one of the three steps of the top-down, three-step approach to stock valuation?

  A. Analysis of alternative industries
  B. Analysis of countries and regions
  C. Analysis of the economy and security markets
  D. Analysis of individual firms and stocks
  B. Analysis of countries and regions

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  Explanation

  Although analysis of alternative countries and regions may be undertaken, that analysis is done under the more general step of analyzing the economy and security markets.

• Question 2749:

  Which of the following statements is most correct?

  A. All of these answers are correct.
  B. None of these answers are correct.
  C. The capital structure that maximizes stock price is also the capital structure, which maximizes earnings per share.
  D. The capital structure that maximizes stock price is also the capital structure, which maximizes the firm's times-interest-earned (TIE) ratio.
  E. The capital structure that maximizes stock price is also the capital structure, which minimizes the weighted average cost of capital (WACC).
  E. The capital structure that maximizes stock price is also the capital structure, which minimizes the weighted average cost of capital (WACC).

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  Explanation

  The capital structure which maximizes the firm's stock price generally calls for a debt ratio which is lower than the one that maximizes EPS. The firm could maximize its TIE by having no debt (i.e. zero interest payments). But, this capital structure would probably not maximize the firm's stock price.

• Question 2750:

  Dick Boe Enterprises, an all-equity firm, has a corporate beta coefficient of 1.5. The financial manager is evaluating a project with an IRR of 21 percent, before any risk adjustment. The risk-free rate is 10 percent, and the required rate of return on the market is 16 percent. The project being evaluated is riskier than Boe's average project, in terms of both beta risk and total risk. Which of the following statements is most correct?

  A. Riskier-than-average projects should have their IRRs increased to reflect their added riskiness. Clearly, this would make the project acceptable regardless of the amount of the adjustment.
  B. The accept/reject decision depends on the risk-adjustment policy of the firm. If the firm's policy were to reduce a riskier-than-average project's IRR by 1 percentage point, then the project should be accepted.
  C. The project should be accepted since its IRR (before risk adjustment) is greater than its required return.
  D. The project should be rejected since its IRR (before risk adjustment) is less than it's required return.
  E. Projects should be evaluated on the basis of their total risk alone. Thus, there is insufficient information in the problem to make an accept/reject decision.
  B. The accept/reject decision depends on the risk-adjustment policy of the firm. If the firm's policy were to reduce a riskier-than-average project's IRR by 1 percentage point, then the project should be accepted.

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  Explanation

  k(s) = 10% + (16% - 10%)1.5 = 10% + 9% = 19%. Original IRR = 21%. 21% - Risk adjustment 1% = 20%. Risk adjusted IRR = 20% > k(s) = 19%.