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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2881:

  What is the primary function of the Securities and Exchange Commission as it relates to a company's financial statements?

  A. None of these answers.
  B. To function as the standard-setting body of the accounting profession.
  C. To provide the investment public with completely independent and unbiased advice regarding the purchase of good quality public securities.
  D. To ensure that a public company makes full and accurate disclosure of all pertinent information relating to a company's business.
  D. To ensure that a public company makes full and accurate disclosure of all pertinent information relating to a company's business.

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  Explanation

  To ensure that a public company makes full and accurate disclosure in the company's registration statement of all pertinent information relating to a company's business, its securities, its financial position and earnings, and the underwriting arrangements.

• Question 2882:

  On June 30, 1996, Union Inc. purchased goodwill for $125,000 when it acquired the net assets of Apex Corp. During 1996, Union incurred additional costs of developing goodwill by training Apex employees ($50,000) and hiring additional Apex employees ($25,000). Before amortization of goodwill, Union's December 31, 1996 balance sheet should report goodwill of ________.

  A. $150,000
  B. $200,000
  C. $75,000
  D. $175,000
  E. $125,000
  E. $125,000

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  Explanation

  Goodwill is recorded only when it is purchased. In this case, only $125,000 was purchased goodwill. The costs incurred to maintain, develop, or restore goodwill must be expensed. In this case, $75,000 will be expensed.

• Question 2883:

  Which of the following statements is correct?

  A. When the MCC (Marginal Cost of Capital) schedule is developed, the first break point always occurs as a result of using up retained earnings.
  B. Flotation costs must be included in the component cost of preferred stock.
  C. If a company with a debt ratio of 50 percent were suddenly exempted from all future income taxes, then, all other things held constant, this would cause its WACC to increase.
  D. The WACC (Weighted Average Cost of Capital) should include only after-tax component costs. Therefore, the required rates of return on debt, preferred, and common equity must be adjusted to an after-tax basis before they are used in the WACC equation.
  E. The cost of retained earnings is generally higher than the cost of new common stock.
  C. If a company with a debt ratio of 50 percent were suddenly exempted from all future income taxes, then, all other things held constant, this would cause its WACC to increase.

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  Explanation

  If a firm paid no income taxes, its cost of debt would not be adjusted downward, hence the component cost of debt would be higher than if T (the firm's marginal tax rate) were greater than 0. With a higher component cost of debt, the WACC would be increased. Of course, the company would have higher earnings, and its cash flows from a given project would be high, so the higher WACC would not impede its investments, i.e., its capital budget would be larger than if it were taxed.

• Question 2884:

  Which of the following is/are true about dividend policies?

  I. Under the Bird-in-the-Hand theory, stocks with lower pay-out ratios have higher required rates of return.

  II. Under the Tax Preference theory, stocks with lower pay-out ratios have lower required rates of return.

  III.

  Under the Modigliani-Miller theory, the price of a stock does not change with a change in the dividend policy.

  A. II only
  B. I and II
  C. I, II and III
  D. I and III
  E. I only
  F. III only
  G. II and III
  D. I and III

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  Explanation

  (II) is not necessarily true when the capital gains tax is higher than realized income tax.

• Question 2885:

  The crowding-out effect refers to the possibility that an

  A. increase in consumption spending will crowd out government spending.
  B. increase in private savings will crowd out the taxable income of households.
  C. increase in the money supply will result in a decline in taxes.
  D. increase in the federal deficit will result in higher interest rates, which will crowd out private investment and consumption.
  D. increase in the federal deficit will result in higher interest rates, which will crowd out private investment and consumption.

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  Explanation

  The crowding out theory implies that government borrowing drives up real interest rates and thus crowds out" private investment. Private investment falls under higher interest rates because the cost of investment (the real interest rate) rises if the government borrows heavily. Under the usual law of supply and demand, the government causes the interest rate to rise under deficit spending because there is a limited supply of loanable funds. The government competes with the private sector for these resources and thus drives up the price (i.e., the interest rate).

• Question 2886:

  Carmina Aburana is a sales assistant to Drew Door, a sales manager at Hicost Brokerage. Hicost has a policy of requiring at least 20% margin on stocks that are deemed illiquid or extremely risky. For these purposes, it creates and updates a list of such stocks on a weekly basis. Yoddly Yoo, Inc. is an up and coming internet firm whose stock has been on this list for some time now. One of Carmina's "blue chip" clients, Amadeus, has been speculating on Yoddly's stock for the past two weeks, repeatedly going in and out of the market. In this process, he has unfortunately generated significant losses and his margin on the account has fallen to 12%. To make up for the shortfall, Amadeus calls up Carmina and requests a "borrowing on the account" of 10% for the next 2 weeks, promising to pay a hefty interest rate of 38%on an annualized basis. Since Amadeus has never been in default, Carmina agrees to the arrangement and moves some funds from another client's account. There is no explicit rule at Hicost that prohibits such an arrangement, though it is clearly an oversight on part of the Compliance department. Drew notices this transaction and calls Carmina for an explanation. On hearing the explanation, he tells Carmina that such arrangements are in violation of the company rules and should not be repeated. After 2 weeks, Amadeus supplies the necessary margin for his account.

  A. Drew has violated Standard II (B) - Professional Misconduct.
  B. Carmina has not violated any AIMR code but Drew has violated Standard III (E) - Responsibilities of Supervisors.
  C. None of these answers, since the infraction was too minor and inconsequential.
  D. Carmina has violated Standard III (B) - Duty to Employer.
  B. Carmina has not violated any AIMR code but Drew has violated Standard III (E) - Responsibilities of Supervisors.

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  Explanation

  Carmina has shown poor judgment in not recognizing the spirit behind Hicost's 20% margin requirement. However, in the absence of any explicit rule in this about fund transfers, she can make a case that she is not in violation of any laws or code of conduct. Drew, on the other hand, has been negligent in his duties. If he understands the import of the margin rule, then he must take steps to unwind the effects of the infraction as soon as possible. In this case, he should have directed Carmina to terminate the arrangement with Amadeus and require that the requisite margin be posted immediately. Further, verbal admonitions are not enough to satisfy supervisory duties when handling a supposed violation of rules. Drew must determine how best to prevent such occurrences in the future and also discuss with the Compliance Department the need for revising the employee rules handbook.

• Question 2887:

  This is the ratio of the price of a stock or an industry index to the value for some stock series.

  A. Block Uptick-Downtick Ratio
  B. Relative Trend
  C. Odd-Lot, Short-Sales Theory
  D. Mutual Fund Cash Positions
  E. Short Sales by Specialists
  F. Diffusion Index
  G. Margin Debt
  H. Dow Theory
  B. Relative Trend

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  Explanation

  The relative trend (or relative-strength ratio) is the ratio of the price of a stock or an industry index to the value for some stock market series like the DJIA or the SandP 400. If this ratio increases over time, it shows that the stock or industry is outperforming the market and a technician would expect this superior performance to continue.

• Question 2888:

  If a firm uses non-discretionary leverage, it must present performance using:

  A. both actual returns and all-cash basis.
  B. all-cash basis i.e. removing leverage effects.
  C. actual returns.
  D. none of these answers.
  B. all-cash basis i.e. removing leverage effects.

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  Explanation

  According to Section B of the PPS standards - "Calculation of Returns" - for non-discretionary leverage, performance must be presented on an all-cash returns basis.

• Question 2889:

  The amount by which a plant asset depreciated is classified as ________.

  A. revenue
  B. an expense
  C. a liability
  D. an asset
  B. 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 2890:

  The sampling method commonly employed when the population is scattered over a large geographic area is known as:

  A. systematic random sampling.
  B. simple random sampling.
  C. stratified random sampling.
  D. cluster sampling.
  D. cluster sampling.

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  Explanation

  Cluster sampling is a modified form of stratified random sampling used to reduce sampling costs when the population is scattered over a large geographic area.