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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3071:

  Thomas Reid is planning his $1 million retirement fund and decides to invest $300,000 in stocks, $500,000 in bonds, and $200,000 in Treasury bills. Donna Craig decides to invest all of her $500,000 retirement fund in bonds. The expected return on stocks equals 12% and the expected return on Treasury bills equals 4%. Both investors compare their performance against a benchmark portfolio that equally weights stocks, bonds, and Treasury bills. The following data are provided for bonds:

  

  Which portfolio has the highest expected return?

  A. Craig's portfolio.
  B. Reid's portfolio.
  C. The equally weighted benchmark.
  B. Reid's portfolio.

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  Explanation

• Question 3072:

  The two most important variables affecting aggregate profit margin are

  A. the capacity utilization rate and rate of inflation.
  B. foreign competition and unit labor costs.
  C. the capacity utilization rate and foreign competition.
  D. the rate of inflation and unit labor costs.
  E. the capacity utilization rate and unit labor costs.
  E. the capacity utilization rate and unit labor costs.

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  Explanation

  Analysis of annual data for the period of 1977 to 1994 has shown that there is a significant positive relationship between the capacity utilization rate and operating profit, and a significant negative relationship between unit labor costs and operating profit. The rate of inflation and foreign competition variables were not found to be significant in a multiple regression on operating profit.

• Question 3073:

  ________ pertains to those characteristics that describe people's mental dispositions, such as personality, lifestyle, and self-concept.

  A. Characgraphics
  B. Socialgraphics
  C. Psychographics
  D. Demographics
  C. Psychographics

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  Explanation

  By comparing demographic and psychographic trends to the features of a property, you can judge whether it is likely to gain or lose favor among potential buyers or tenants.

• Question 3074:

  Raw land is an example of a(n)

  A. income property.
  B. all of these answers.
  C. commercial property.
  D. speculative property.
  D. speculative property.

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  Explanation

  A speculative property is generally raw land and real estate investment properties that are expected to provide returns primarily from appreciation in value.

• Question 3075:

  If a firm recognizes expenses before that dictated by accrual accounting, which of the following best describes the effects on income, total assets and retained earnings?

  Income Total assets Retained earnings

  I. Understated Understated Understated

  II. Understated Overstated Understated

  III. Overstated Understated Overstated

  IV.

  Understated Overstated Overstated

  B. II.
  C. IV.
  D. III.
  A

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  Explanation

  Total assets Retained earnings Understated Understated Overstated Understated Understated Overstated Overstated Overstated

  If expenses are recognized before they should be, then income gets understated since you subtract more from the revenues than you should. Hence, retained earnings get understated, leading to an understatement of total equity. Since assets equal liabilities plus equity and liabilities have not been affected, the understatement of equity leads to an understatement of assets.

• Question 3076:

  A firm has just experienced a LIFO liquidation under inflation. Which of the following could be true?

  I. The firm's purchases were lower than the number of units sold.

  II. The firm experienced a cash drain due to taxes.

  III.

  The firm's income was understated.

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

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  Explanation

  The LIFO Reserve is defined as the difference between the values of the inventory under FIFO and under LIFO. A decrease in this reserve is referred to as LIFO liquidation. Under the usual case of rising prices, this occurs when units sold exceed units purchased, leading to a "dipping" into the LIFO layers. Since some of the goods sold were purchased at lower prices in previous periods as accounted for by LIFO, COGS gets understated compared to the case where the firm purchases the sold goods in the current period instead of dipping into the LIFO layers. Hence, the firm's income is overstated, leading to higher taxes paid.

• Question 3077:

  As a general rule, the capital structure that

  A. Minimizes the required rate on equity also maximizes the stock price.
  B. Maximizes the price per share of common stock also minimizes the weighted average cost of capital.
  C. Maximizes expected EPS also maximize the price per share of common stock.
  D. None of these are correct.
  E. Minimizes the interest rate on debt also maximizes the expected EPS.
  B. Maximizes the price per share of common stock also minimizes the weighted average cost of capital.

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  Explanation

  The optimal capital structure is the one that maximizes the price of the firm's stock, and this generally calls for a debt ratio which is lower than the one that maximizes expected EPS.

• Question 3078:

  What is the critical z-value for a one tailed lower test at the 1% level of risk?

  A. + 2. 58
  B. +2. 33
  C. -2. 58
  D. None of these answers
  E. -2. 33
  E. -2. 33

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  Explanation

  This is found by subtracting the 0.01 from 0.5 and then finding the z-value for 0.49.

• Question 3079:

  Over a given year, a firm's total assets increased by $8,000 and total liabilities decreased by $6,000. If the firm did not issue any new equity and paid out $1,800 in dividends, then its net income during the year was ________.

  A. $12,200
  B. $200
  C. $3,800
  D. $15,800
  D. $15,800

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  Explanation

  Total assets - Total liabilities = Equity. Hence,

  Change in Assets - Change in Liabilities = Change in Equity.

  Thus, change in equity = 8,000-(-6,000) = $14,000 All of the net income not paid out as dividends goes into increasing the equity. Since no new shares were issued, Net Income = change in equity + dividends paid. This gives net income =

  $14,000 + $1,800 = $15,800.

• Question 3080:

  Projects whose cash flows are not affected by the acceptance or rejection of other projects are known as ________.

  A. independent projects
  B. project net worth optimization
  C. optimal capital budgeting
  D. equity enhancement
  E. mutually exclusive projects
  A. independent projects

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  Explanation

  Independent Projects are defined as projects whose cash flows are not affected by the acceptance or rejection of other projects.