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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3011:

  Anti-dilutive securities are those that:

  A. are always included in the computation of the Diluted EPS.
  B. differentiate between a simple capital structure and complex capital structure.
  C. none of these answers.
  D. increase the earnings per share when assumed exercised.
  D. increase the earnings per share when assumed exercised.

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  Explanation

  Anti-dilutive securities are always excluded from the computation of the Diluted EPS.

• Question 3012:

  The major duties of an investment management company are:

  I. handling of redemptions and dividends

  II. investment research and portfolio management

  III. recommending stocks and bonds to investors

  IV.

  arranging bank loans for fund investors

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

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  Explanation

  The major duties of an investment management company are investment research and portfolio management, handling of redemptions and dividends and issuing securities.

• Question 3013:

  Which of the following equations is INCORRECT?

  A. Real Risk-Free Rate = [(1 + nominal Risk-Free rate) * (1 + inflation rate)] - 1. B. Expected Return (SML) =Rnominal Risk-Free+ (RMarket- Rnominal Risk-Free) * Beta.
  C. RequiredReturnnominal= [(1 + Risk-FreeRatereal) * (1 + Expected Inflation) * (1 + Risk Premium)] - 1. D. RiskpremiumFundamental view= total risk = business risk + financial risk + liquidity risk + exchange rate risk + country risk.
  A. Real Risk-Free Rate = [(1 + nominal Risk-Free rate) * (1 + inflation rate)] - 1. B. Expected Return (SML) =Rnominal Risk-Free+ (RMarket- Rnominal Risk-Free) * Beta.

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  Explanation

  The real Risk-Free Rate = [(1 + nominal Risk-free Rate) divided by (1 + inflation rate)] ?1. The other equations are correct.

• Question 3014:

  Assume the following information about a large-scale oil drilling company.

  Net income / sales = 0.18 Total assets / common equity = 1.82 Sales / total assets = 0.70 Dividend payout ratio = 0.35

  What is the expected annual growth rate of this firm's dividends?

  A. 4. 50%
  B. The answer cannot be determined from the information provided.
  C. 14. 90%
  D. 8.03%
  E. None of these answers is correct.
  F. 30.42%
  C. 14. 90%

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  Explanation

  A popular model for determining the growth rate of dividends is the following: g = RR * ROE

  Where: g = the expected growth rate of dividends, RR = the retention rate (this is equal to 1 - dividend payout ratio), and ROE = the return on equity.

  Although it may at first appear otherwise, all of the necessary information has been provided. Remember the Du Pont decomposition process for ROE, which breaks down the ROE figure into the following:

  ROE = (Net Income / Sales) * (Sales / Total Assets) * (Total Assets * Common Equity)

  Mathematically, this will break down into (Net Income / Common Equity), the ROE figure. The calculation of the return on equity for this company is as follows:

  ROE = [0.18 * 0.70 * 1.82] = 0.22932, or 22. 93%.

  Now that the ROE figure has been determined, the calculation of the growth rate of dividends is as follows:

  g = [(1 - 0.35) * 0.2293] = 14. 9045%

• Question 3015:

  An intern with Churn Brothers Brokerage has been asked to calculate the Price-to-earnings ratio for Clay Industries. She has been provided with the following information:

  D0 = $1.25 g = 12% per year k = 15. 5% per year Earnings per share: $2. 78

  Using this information, what is the price-to-earnings ratio for Clay Industries?

  A. None of these answers is correct.
  B. 17. 05
  C. 14. 39
  D. 21.27
  E. 15. 21
  F. 12. 85
  G. The answer cannot be calculated from the information provided.
  C. 14. 39

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  Explanation

  By dividing each side of the infinite period dividend discount equation by the EPS figure, it is possible to determine the P/E ratio. This is illustrated as follows:

  P/E = (D1 / EPS)/(k-g)

  Where: D1 = the dividend at t1, EPS = the earnings per share calculation for t1, k = the required rate of return, and g = the expected growth rate.

  Manipulating the infinite period dividend discount model to solve for the PE is a rather intuitive process.

  Consider the fact that an investment's value is truly nothing more than the present value of all future returns. So said, dividing both sides of the infinite period dividend discount model equation by the EPS figure should yield the appropriate

  multiple, or "earnings multiplier." This is the price-to-earnings ratio.

  In this example, we are provided all of the necessary information. However, the dividend at t1 must be calculated manually by multiplying D0 by (1 + growth rate). This will yield a figure of $1.40 for D1. Now that D1 has been determined, we

  can solve for the P/E. Imputing all the given information into the equation provided above will yield the following:

  P/E = ($1.40 / $2. 78) / (15. 5% - 12%) = 14. 39

  If you chose 12. 85, remember that it is the dividend at t1 that is used in the determination of the P/E, not the dividend at t0.

• Question 3016:

  A firm has a dividend payout ratio of 60%, and earns a 10% per year return on its equity. Calculate the expected annual growth rate of the firm's dividends.

  A. 8%
  B. Not able to compute with the above data.
  C. 7%
  D. 4%
  D. 4%

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  Explanation

  g=(RR)(ROE)=0.4*0.10.

• Question 3017:

  A sample of size 600 is drawn from a population. The sample mean equals 329. The total width of the 99% confidence interval for the population mean is 893. The estimated population variance equals ________.

  A. 6. 7
  B. 4. 9
  C. 6. 3
  D. 7. 3
  C. 6. 3

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  Explanation

  If z is the z-value corresponding to the specified confidence level, the sample mean is M and the standard deviation is D in a sample size N, the confidence interval is specified as [M - z*D/sqrt(N), M + z*D/sqrt(N)]. Thus, the width of the interval equals 2*z*D/sqrt(N). In the present case, for the 99% confidence interval, the normal probability table gives z = 2. 58. The sample standard deviation equals sqrt(893) = 29.88. Therefore, the width of the 99% interval is 2*2. 58*29.88/ sqrt(600) = 6. 30.

• Question 3018:

  Which of the following is an essential characteristic of a liability?

  A. The identity of the recipient entity must be known to the obligated entity before the time of settlement.
  B. Liabilities represent an obligation that has arisen as the result of a previous transaction.
  C. None of these answers.
  D. Liabilities must be legally enforceable.
  E. Liabilities must require the obligated enterprise to pay cash to a recipient entity.
  B. Liabilities represent an obligation that has arisen as the result of a previous transaction.

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  Explanation

  A liability has 3 essential characteristics:

  1. It represents an obligation that requires settlement by probable future transfer or use of assets.

  2.

  The firm has little or no discretion to avoid the obligation.

  3.

  The transaction or other event, giving rise to the obligation has already occurred.

• Question 3019:

  The disclosures for retroactive compliance apply to composites formulated prior to ________.

  A. January, 1989
  B. January, 1992
  C. January, 1991
  D. January, 1993
  E. January, 1990
  D. January, 1993

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  Explanation

  The effect date to be in compliance with AIMR-PPS was January 1, 1993. Any composites which predate the effective date can be brought into compliance retroactively.

• Question 3020:

  Consider the following information for Company ABC:

  Current Price of Stock $25. 5

  Expected dividend in 1 Year $1.00

  Growth rate 8.0%

  Beta 1.2

  Risk Free Rate 4. 5%

  Calculate this company's cost of retained earnings using the Discounted Cash Flow (DCF) method.

  A. 13. 30%
  B. 8.0%
  C. 12. 0%
  D. 11.92%
  E. 12. 2%
  D. 11.92%

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  Explanation

  The DCF method for estimating the cost of retained earnings states: Cost of Retained Earnings = (Dividend for period 1 / Current Price) + Growth Rate. In this case the estimated Cost of Retained Earnings = (1 / 25. 5) + 8.0% = 3. 92 + 8.00 = 11.92%