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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2961:

  Which of the following items that are reported on an income statement will directly affect the retained earnings from one accounting period to another?

  A. The sale of new common stock.
  B. The payment of cash dividends.
  C. The purchase of new equipment with the proceeds of a loan.
  D. None of these answers.
  E. Accounts payable.
  B. The payment of cash dividends.

  ---

  Explanation

  Only the payment of dividends will directly affect the change in a company's retained earnings from one accounting period to another. The change in retained earnings consists of a company's beginning retained earnings, plus net income, minus cash dividends paid and the repurchase (not sale) of stock.

• Question 2962:

  A positively skewed distribution:

  A. has fat tails.
  B. is skewed to the right.
  C. has a large variance.
  D. is skewed to the left.
  B. is skewed to the right.

  ---

  Explanation

  In a positively skewed distribution, large values are more common than correspondingly small values. This skews the distribution to the right, moving the mean to the right of the median.

• Question 2963:

  The formula for calculating profit margin is:

  A. net sales minus total expenses divided by net income
  B. none of these answers
  C. net income divided by net sales
  D. total sales divided by total expenses
  C. net income divided by net sales

  ---

  Explanation

  Profit margin, also called return on net sales, is calculated by dividing net income by net sales. This ratio measures the average portion of each dollar of revenue that ends up as profit.

• Question 2964:

  The stand-alone risk of a project is measured by:

  A. the project's impact on the systematic risk of the firm's stock.
  B. the project's impact on the unsystematic risk of the firm's stock.
  C. the variability of the project's projected returns.
  D. the project's impact on the uncertainty about the firm's future earnings.
  C. the variability of the project's projected returns.

  ---

  Explanation

  Standalone risk evaluates the risk of a project ignoring all portfolio aspects by looking at the variability of the project's projected returns.

• Question 2965:

  You are examining a portfolio composed of 10% money-market investments, 30% bonds, and 60% stocks. Last year, the return on the money-market investments was 4%; the return on bonds was 9%, and the return on stocks was -11%. What is the portfolio weighted average return?

  A. -3. 00%.
  B. -4. 50%.
  C. None of these answers is correct.
  D. -3. 25%.
  C. None of these answers is correct.

  ---

  Explanation

  The portfolio weighted-average mean return is equal to the sum (as i goes from 1 to n) of w_i * X_i, where w_i is the percentage weight in the portfolio of the ith asset, and X_i is the investment return of the ith asset. Here, we get a weighted mean of 0.10 * 0.04 + 0.30

  * 0.09 + 0.60 * -0.11 = -3. 50%. None of these answers is correct.

• Question 2966:

  You are examining a group of 6 companies. Their average profit margins have been 49%, 10%, 5%, 35%, 30%, and 30%. What is the range of profit margins?

  A. 49.0%.
  B. 30.0%.
  C. 44. 0%.
  D. 5. 0%.
  C. 44. 0%.

  ---

  Explanation

  The range = the maximum value - the minimum value. Here, we have 49% - 5% = 44%.

• Question 2967:

  Dana Leone, Level 2 candidate in the CFA Program, is a manager in the capital planning division of a large consumer products company. Today, she must decide whether to recommend Project Forrest or Project Trieste to the Division Director. Leone's assistant has determined the following information about the projects (which are of approximately the same size and life):

  

  Note:NPV = Net Present Value MIRR = Modified Internal Rate of Return PBP = Pay Back Period WACC = Weighted Average Cost of Capital Based on the information in the above table, which of the following statements is FALSE? If company management is most concerned with:

  A. increasing the value of the firm, Leone should recommend Project Forrest.
  B. liquidity, Leone should recommend Project Trieste.
  C. return safety margin, Leone should recommend Project Forrest.
  D. shareholder interests, Leone should recommend Project Trieste.
  A. increasing the value of the firm, Leone should recommend Project Forrest.

  ---

  Explanation

  Since Leone can recommend either Forrest or Trieste, this question should be answered using the decision rules for mutually exclusive projects. For a company most interested in shareholder wealth and increasing the value of the firm (which are the same concept), Project Trieste is best because it has the higher NPV. NPV is the measure that indicates the direct impact on shareholder wealth. The other statements are true. The PBP measures liquidity, i.e., the shorter the PBP, the higher the liquidity.The IRR method does provide a measure of safety margin (and Project Forrest does have the highest IRR).

• Question 2968:

  A firm's financial statements reveal the following data:

  operating profit margin 41% interest expense ratio 4. 2% debt-to-equity ratio 0.45 total asset turnover 1.6 tax rate 45%

  The firm's ROE equals ________.

  A. 28.91%
  B. 48.97%
  C. 19.68%
  D. 33. 23%
  B. 48.97%

  ---

  Explanation

  ROE = Net income/Equity

  Now, Net Income = (Operating profits - interest expense)*(1 - tax rate)

  Therefore, ROE = (Operating profits/equity - interest expense/equity) *(1 - tax rate) interest expense/equity = (interest expense/assets)*(assets/equity) = interest expense ratio*(1+debt/equity) = 4. 2%*(1+0.45) = 6. 09% Operating profits/equity

  = (Operating profits/sales)*(sales/assets)*(assets/equity) = 41%*1.6*1.45 = 95. 12%

  Thus, ROE = (95. 12% - 6. 09%)*(1-45%) = 48.97%

• Question 2969:

  The total market value of stocks in an investment company's portfolio divided by total outstanding shares (with no further transactions) is ________.

  A. 12b-1 amount
  B. forward earnings per share
  C. market value of an open-end investment company
  D. market value of a closed-end fund
  E. net asset value
  E. net asset value

  ---

  Explanation

  The net asset value (NAV) equals the total market value of all the funds assets divided by the number of fund shares outstanding.

• Question 2970:

  The real risk free rate is 5% per year and the expected inflation rate is 3% per year. What is the annual nominal rate of interest?

  A. 8.2%
  B. Not able to compute with the above data.
  C. 8%
  D. 2%
  A. 8.2%

  ---

  Explanation

  Nominal rate = (1.05)*(1.03)=8.2%.