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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2901:

  The mean of a normally distributed group of weekly incomes of a large group of executive is $1,000 and the standard deviation is $100. What is the z-score for an income of $1,100?

  A. -0.90
  B. 2. 00
  C. None of these answers
  D. 1.683
  E. 1.00
  E. 1.00

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  Explanation

  z = (x-u)/sigma = 1100 - 1000/100 = 1.

• Question 2902:

  Name the fee charged by a fund that is typically .25 to 1.00 percent of the average net assets?

  A. low-load
  B. commissions
  C. 12b-1 plan
  D. deferred sales load
  E. no-load
  F. management fees
  F. management fees

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  Explanation

  The fee, to compensate professional managers, is on a sliding scale that declines with the size of the fund.

• Question 2903:

  An analyst with Smith, Kleen, and Beetchnutty is attempting to value shares of an insurance company. The insurance company has been growing at a very stable rate for much of the last decade, and is expected to continue growing at a similar pace in the future. In determining the value of the insurance company's common stock, assume the following information:

  Required rate of return on equity: 12. 75% per year Expected dividend growth rate: 9.50% per year Dividend at t0: $0.88

  Using this information, determine the value per-share of this insurance company's common stock.

  A. None of these answers is correct.
  B. $29.65
  C. $32. 72
  D. $28.55
  E. The answer cannot be calculated from the information provided.
  F. $24. 12
  B. $29.65

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  Explanation

  In this example, the growth rate of dividends is assumed to remain stable, allowing the use of the Gordon Model. The Gordon Model is also known as the "constant growth dividend discount model" and takes the following form:

  P0 = [D1 / (r - g)]

  Where

  P0 = the price of common stock X at time 0

  D1 = the expected dividend at t1

  r = the required rate of return on equity investments and g = the expected growth rate of dividends.

  Since the dividend at t1 is not provided, we must calculate it manually by multiplying the dividend at t0 by (1 + g). This will produce an answer of $0.9636 at t1. Now that the dividend at t1 has been determined, the given information can be put

  into the equation provided, leading to the following series of calculations:

  P0 = [$0.9636 / (.1275 - .095)] = $29.65.

  When using the Gordon model, remember that the required rate of return "r" must be greater than the expected growth rate "g." Otherwise, the equation will produce a nonsensical answer.

• Question 2904:

  A firm has legal cash expenses of 300 and a tax rate of 40. If it chooses to capitalize the costs and depreciated them over 3 years, the operating cash flow under capitalization, compared to that under expensing, will be ________.

  A. smaller by 220
  B. larger by 180
  C. larger by 220
  D. smaller by 180
  C. larger by 220

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  Explanation

  Under expensing, the operating cash flow will be reduced due to this expense by 300*(1-0.4) = 180 (there is an outflow of 300 but since the expenses are tax deductible, taxes on total income get reduced by 120). Instead, if the firm capitalized the expense, an asset value of 300 will be generated. The entire expense will be charged against investing cash flow. Depreciation of capitalized expense leads to a depreciation expense of 300/3 = 100. This will reduce taxes paid by 100*0.4 = 40. Thus, capitalization leads to an increase in the operating cash flow of 40. In summary, expensing reduces the expense by 180 while capitalization increases operating cash flow by 40. Thus, operating cash flow under capitalization is larger by 40 - (-180) = 220.

• Question 2905:

  ________ indicates the price at which a property would sell under current market conditions.

  A. Cost approach value
  B. Income approach value
  C. Market value
  D. Appraisal
  E. Market approach value
  C. Market value

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  Explanation

  Remember though, that many properties sell for prices significantly above or below their estimated market values.

• Question 2906:

  Assume the following information about an international textile company:

  Next annual dividend: $1.10 Earnings per share next year: $2. 45 Anticipated growth rate: 9% per year Required rate of return: 11% per year What is the expected earnings multiplier for this utility company?

  A. 50
  B. 31
  C. 26
  D. 19
  E. 16
  F. None of these answers is correct.
  F. None of these answers is correct.

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  Explanation

  The earnings multiplier for this company is found as 22. 45, thus none of the answers is correct.

  To determine the earnings multiplier (i.e. the price-to-earnings ratio) for an individual company, use the following formula:

  P/E = [(d1 / e1) / (k - g)]

  Where: P/E = the earnings multiplier,d1 / e1 = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated future growth rate.

  In this example, all of the necessary information has been provided, and the calculation of the earnings multiplier is as follows:

  In this example, all of the necessary information has been provided, but some rearranging is necessary. Specifically, the dividend payout ratio must be determined. This figure is found as follows:

  Dividend payout ratio = [$1.10 / $2. 45] = 0.44898, or 44. 90%

  Now that the dividend payout ratio has been determined, we can solve for the appropriate earnings multiplier. The calculation of this figure is found as follows:

  P/E = [0.4490 / (0.11 - 0.09] = 22. 45

  This is likely a realistic multiple for a company within the international textile sector.

• Question 2907:

  A mutual fund started last year by issuing 1,000 shares at $100 per share. This amount was invested in 3 different stocks,

  A - 500 shares at $50 per share B - 600 shares at $70 per share C - 1,000 shares at $33 per share

  The current stock prices are $58 for A, $63 for B and $37 for stock C. The fund's NAV equals ________.

  A. $100
  B. $98.3
  C. none of these answers
  D. $102. 9
  C. none of these answers

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  Explanation

  The fund's total assets are worth 500 * 58 + 600 * 63 + 1,000 * 37 = 103,800. Hence, the NAV equals 103,800/1,000 = $103. 8

• Question 2908:

  The additional risk associated with a firm's earnings when it uses debt capital is known as

  A. business risk.
  B. systematic risk.
  C. capital market risk.
  D. financial risk.
  D. financial risk.

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  Explanation

  Financial risk is the additional risk associated with a firm's earnings when it uses debt capital.

• Question 2909:

  Which of the following is/are FALSE?

  I. Over the life of the firm, income and cash flow are the same.

  II. Cash accounting follows the Matching Principle of matching cash flows to appropriate periods.

  III. Accrual accounting matches revenues with the associated costs.

  IV.

  Accrual accounting allocates many cash flows to time periods other than those in which they occur.

  A. II only
  B. I, III and IV
  C. III and IV
  D. I, II, III and IV
  A. II only

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  Explanation

  Unlike Accrual accounting, Cash accounting recognizes revenues and expenses when cash flows occur, not necessarily when the earnings process is complete or goods and services consumed.

• Question 2910:

  A survey of top executives revealed that 35% of them regularly read Time magazine, 20% real Newsweek and 40% read U.S. News and World Report. Ten percent read both Time and U.S. News and World Report. What is the probability that a particular top executive reads either Time or U.S. News and World Report regularly?

  A. 0.85
  B. 0.06
  C. None of these answers
  D. 0.65
  E. 1.00
  D. 0.65

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  Explanation

  35% + 40% - 10% = 65%