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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2751:

  Stewart has been hired by Goodner Industries, Inc., to manage its pension fund. Stewart's fiduciary duty is owed to:

  A. the management of Goodner.
  B. the participants and beneficiaries of Goodner's pension plan.
  C. the shareholders of Goodner.
  D. each of these answers equally.
  B. the participants and beneficiaries of Goodner's pension plan.

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  Explanation

  Under Standard IV (B.1), Fiduciary Duties, members who manage a company's pension funds owe a fiduciary duty to the participants and benefits of the plan, not the management of the company or the company shareholders.

• Question 2752:

  Technicians believe that a high confidence index is

  A. a bullish sign.
  B. indicative of an approaching trough.
  C. an unimportant sign.
  D. indicative of an approaching peak.
  E. a bearish sign.
  A. a bullish sign.

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  Explanation

  The confidence index measures the yield spread between high-grade bonds and a large cross section of bonds. Some technical analysts believe that during periods of high confidence, investors are more willing to invest in lower-quality bonds, thereby pushing down their yields, and increasing the confidence index. A high index value is thus viewed as a bullish sign.

• Question 2753:

  Which of the following statements about capital structure theory is most correct?

  A. In general, an increase in the corporate tax rate would cause firms to use less debt in their capital structures.
  B. Signaling theory suggests firms should in normal times maintain reserve-borrowing capacity which can be used if an especially good investment opportunity comes along.
  C. All of the statements are correct.
  D. None of the statements are correct.
  E. According to the "trade-off theory," a decrease in the costs of debt would lead firms to increase equity financing in their capital structures.
  B. Signaling theory suggests firms should in normal times maintain reserve-borrowing capacity which can be used if an especially good investment opportunity comes along.

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  Explanation

  An increase in the corporate tax rate reduces the after-tax cost of debt making it more attractive relative to equity. Thus, firms might be expected to use more debt. The trade-off theory of leverage states a firm trades off the benefits of debt financing (favorable corporate tax treatment) against the higher interest rates and bankruptcy costs.

• Question 2754:

  A mature firm, in the face of a new product introduced by its competition, has suddenly seen its profit margins fall by 50%. The market expects the management to streamline its sales force in a very short time and increase the sales-to-assets ratio by 30%. The dividend growth rate due to these changes will:

  A. decrease by 50%.
  B. decrease by 15%.
  C. increase by 30%.
  D. decrease by 35%.
  D. decrease by 35%.

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  Explanation

  Use g = ROE * retention ratio and

  ROE = profit margin * asset turnover * financial leverage.

  If profit margin falls by 50% and asset turnover increases by 30%, the change in ROE is (1-0.5)*(1+0.3) - 1 = -0.35. With retention ratio constant, a 35% fall in ROE translates into a 35% fall in dividend growth rate.

• Question 2755:

  A fixed-income portfolio manager at Franken Investments is considering adding a security to his existing portfolio. The bond, issued by KDJ Company, has an option adjusted spread (OAS) equal to 0.23% and a Z-spread equal to 0.15%. The manager is concerned that his portfolio is dominated by callable bonds and will only accept new securities if they contain no call options. Should the portfolio manager add the KDJ bond to his portfolio?

  A. Yes, the negative option cost implies the bond is putable.
  B. No, the positive option cost implies the bond is callable.
  C. No, the negative option cost implies the bond is callable.
  A. Yes, the negative option cost implies the bond is putable.

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  Explanation

• Question 2756:

  A researcher has rejected the null hypothesis. The p-value in the test must be:

  A. less than the significance level.
  B. more than 1-significance level.
  C. less than 1-significance level.
  D. more than the significance level.
  A. less than the significance level.

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  Explanation

  The lowest significance level at which the null hypothesis can be rejected is called the p-value of the test. Thus, if the p-value is less than the significance level, the null hypothesis can be rejected at that significance level. To fix this in your mind, think about the p-value as the maximum probability that the null hypothesis is true despite observing the value of the test statistic that you have in the sample at hand. For e.g., suppose the p-value for a given sample turns out to be 3%. Then, if you reject the null, the probability that you have made an error in rejecting it is at most 3%. Clearly, if a critic asked you, "Is the probability that you have made an error less than 5%?" your answer would be, "yes." The critic will then conclude that your test is significant at the 5% level and perhaps even at a lower level.

• Question 2757:

  In comparing two mutually exclusive projects of equal size and equal life, which of the following statements is most correct?

  A. None of these answers are correct.
  B. The project with the higher NPV may not always be the project with the higher IRR.
  C. The project with the higher NPV may not always be the project with the higher MIRR.
  D. The project with the higher IRR will always be the project with the higher MIRR.
  E. All of the answers are correct.
  B. The project with the higher NPV may not always be the project with the higher IRR.

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  Explanation

  Due to reinvestment rate assumptions, NPV and IRR can lead to conflicts; however, there will be no conflict between NPV and MIRR if the projects are equal in size (which is one of the assumptions in this question).

• Question 2758:

  Performance Presentation Standards require that income and capital appreciation be presented in addition to total return when dealing with ________.

  A. anti-linear appreciation
  B. real estate
  C. none of these answers
  D. long-term liabilities
  B. real estate

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  Explanation

  For real estate, PPS require that income and capital appreciation be presented in addition to total return.

• Question 2759:

  Inflation has been about 5% for the last several years. There is widespread fear that oil and natural gas prices are about to spike at the same time there is unusually high unemployment. If inflation were actually 6% next year, and this causes no change in real GDP, what can be said about the general expectation for inflation?

  A. producers were forming inflation forecasts based on rational expectations
  B. the general consensus inflation forecast must have been less than 6%
  C. producers were basing their inflation views on adaptive expectations
  D. consumers must have foreseen inflation of 6% and increased savings accordingly
  E. the oil scare held down GDP
  F. none of these answers is correct
  D. consumers must have foreseen inflation of 6% and increased savings accordingly

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  Explanation

  If actual inflation were 6%, and this caused no change in real GDP, we know that inflation expectations were probably higher than 6%. There are two major theories as to how inflation expectations are formed. One is adaptive expectations theory. This states that economic participants will expect inflation to be about what it was in the past. The rational expectations hypothesis states that economic participants will consider all available information and make an estimation based on this knowledge. In this case, we are told that inflation has been about 5% the last several years. Therefore if producers are generally following the adaptive expectations hypothesis, they would have expected 5% inflation. However, we are also told that there may be inflationary pressure from the commodities market. Therefore under the rational expectations hypothesis, market participants would expect inflation to be something higher than 5%. Since we know that expectations must be higher than 6%, we also know that market participants must be forming their expectations rationally.

• Question 2760:

  Use the following financial data on Enterprise:

  a.

  Sale of equipment $32,000

  b.

  Loss on equipment sale $9,000

  c.

  Dividends paid $12,500

  d.

  Purchase of an office suite $104,000

  e.

  Common stock repurchase $45,000

  f.

  Dividends received from investments $8,500

  g.

  Interest received on Treasury bonds $1,200

  h.

  Supplier accounts paid $3,700

  i.

  Cash collection from customers $14,200

  j.

  Ending cash balance $98,000

  In the above question, the financing cash flow is ________.

  A. -$12,500
  B. -$45,000
  C. -$57,500
  D. -49,500
  C. -$57,500

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  Explanation

  Items c and e are the financing cash flows.