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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 281:

  In the equation Y' - a + bX, what is Y'?

  A. Slop of the line
  B. Value of Y when X=0
  C. None of these answers
  D. Predicted value of Y, given a specific X value
  E. Y intercept
  D. Predicted value of Y, given a specific X value

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  Explanation

  The regression is written as Y' = a + bX. The letter "a" is the Y intercept and b is the slope of the line. Y' is the predicted value of Y given a specific value of X.

• Question 282:

  Industries which are cyclical and heavily oriented toward research tend to have high levels of ________. Industries which are subject to high levels of lawsuits tend to high levels of ________.

  A. debt; equity
  B. equity; equity
  C. equity; debt
  D. debt; debt
  B. equity; equity

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  Explanation

  Cyclical business conditions, high dependence on research and development and higher expected liabilities are all indicative of high business risks. This makes firms more risk-averse to debt.

• Question 283:

  Katrina Whittcomb, junior analyst, is trying to understand what variables impact the price/earnings (P/E) ratio for a stock. Specifically, she wants to determine under what circumstances the P/E ratio will increase or decrease. A senior analyst

  in the group, Clinton Dermont, devises the following question to help her understand the impact of changes in P/E variables. To make the question less theoretical, he provides the following assumptions:

  Using the information above, determine which of the following statements is most likely FALSE. All else equal, if the:

  A. dividend payout increases, the P/E ratio will increase.
  B. expected inflation rate decreases, the P/E ratio will rise above 12. 5.
  C. earnings retention ratio increases, the P/E ratio will increase.
  D. risk free-rate increases, the P/E ratio will decrease.
  A. dividend payout increases, the P/E ratio will increase.

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  Explanation

  Memo:The P/E ratio = Dividend Payout Ratio / (ke?g), Impact of variables:

• Question 284:

  The following information should be used according to the provisions of SFAS 95 (Statement of Cash flows) and using the following data.

  Net Income $50,000 Provision for bad debts $2,000 Increase in Inventory $1,000 Increase in accounts payable $2,000 Purchase of new equipment $15,000 Sale of equipment for $10,000 gain $20,000 Depreciation expense $5,000 Repurchase of common stock $10,000 Payment of dividend $4,000 Interest payment $3,000

  What is change in cash?

  A. $39,000
  B. $45,000
  C. $46,000
  D. $49,000
  A. $39,000

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  Explanation

  $50,000 + (-$1,000 + $2,000 - $15,000 + $20,000 - $10,000 - $4,000 - $3,000)

• Question 285:

  Two stocks have identical risk, but one of them offers a higher expected return than the other. This apparent inefficiency in the market:

  A. indicates that arbitrageurs must be unaware of the mispricing.
  B. may persist and even grow larger before any correction occurs.
  C. can only arise when arbitrageurs lack the capital to exploit the situation.
  B. may persist and even grow larger before any correction occurs.

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  Explanation

• Question 286:

  A company is considering an expansion project. The company's CFO plans to calculate the project's NPV by discounting the relevant cash flows (which include the initial up-front costs, the operating cash flows, and the terminal cash flows) at the company's cost of capital (WACC). Which of the following factors should the CFO include when estimating the relevant cash flows?

  A. All of the answers are correct.
  B. Any interest expenses associated with the project.
  C. None of the answers are correct.
  D. Any opportunity costs associated with the project.
  E. Any sunk costs associated with the project.
  D. Any opportunity costs associated with the project.

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  Explanation

  Sunk costs should be excluded from the analysis, and interest expense is incorporated in the WACC and not the cash flows.

• Question 287:

  What is the annual Internal Rate of Return of this series of annual cash flows: Year 0: <$15,000>, Year 1: $8,000, Year 2: $8,000, Year 3: $1,000, Year 4: $4,000 (Note that the <> are used to indicate a negative number).

  A. 16. 61%
  B. 17. 12%
  C. 18.83%
  D. 15. 55%
  E. 13. 74%
  C. 18.83%

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  Explanation

  On the BAII Plus, press CF 2nd CLRWork 15000 +/- ENTER DownArrow 8000 ENTER DownArrow DownArrow 8000 ENTER DownArrow DownArrow 1000 ENTER DownArrow DownArrow 4000 ENTER DownArrow DownArrow 2nd Quit. Then press Irr CPT. On the HP12C, press these keys: 15000 CHS BlueShift CFo 8000 BlueShift CFj 8000 BlueShift CFj 1000 BlueShift CFj 4000 BlueShift CFj. Then press YellowShift Irr. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure the BAII Plus has the P/Y value set to 1.

• Question 288:

  The sum of the squares of 65 observations equals 862. The sum of the observations equals 93. The sample standard deviation of the observations equals ________.

  A. 11.21
  B. 1.43
  C. 3. 37
  D. 4. 96
  C. 3. 37

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  Explanation

  For N observations, it is easy to show that

  sample variance*(N-1) = (sum of squares) - N*(mean^2)

  Hence, in this case, sample variance = (862 - 65*(93/65)^2)/64 = 11.39. The standard deviation then equals sqrt(11.39) = 3. 37

  Note: You should be careful about the difference between population variance and sample variance. The formula for population variance is:

  population variance*N = (sum of squares) - N*(mean^2)

  You can expect an exam question which asks for population variance, with the choices given containing both the population and the sample variances or vice versa.

• Question 289:

  You are faced with a counting problem in which you must choose k objects from n total objects. The order of choosing matters. The counting method you should use is:

  A. The binomial formula.
  B. The multinomial formula.
  C. None of these answers is correct.
  D. The permutation rule.
  D. The permutation rule.

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  Explanation

  We need the general permutation formula, which gives the number of ways that k objects can be chosen from n items, with regard to order. The formula is n_P_k = n! / (n-k)!

• Question 290:

  If a company changes the useful life of its assets from 10 years to 12 years, this will be recorded as ________.

  A. a non recurring gain
  B. a change in accounting principle
  C. an extraordinary item
  D. none of these answers
  D. none of these answers

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  Explanation

  The depreciation schedule for each asset affected is simply recalculated for the remainder of the life.