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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3081:

  What is a characteristic of an open-end investment company?

  A. NAV is based on current market prices
  B. its stock trades on the regular secondary market
  C. its market price is determined by supply and demand
  D. the NAV is computed twice daily
  E. it continues to repurchase and sell shares
  E. it continues to repurchase and sell shares

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  Explanation

  Open-end investment companies (mutual funds) sell additional shares of the fund at the NAV, with or without sales charge, or redeem shares at the NAV, with or without redemption fees.

• Question 3082:

  When preparing a direct method statement of cash flows, the calculation of equity financing cash flows requires analysis of the change in stockholders' equity, separating all of the following except

  A. investments in affiliates.
  B. dividends declared.
  C. net income.
  D. shares issued/repurchased.
  E. changes in valuation accounts.
  A. investments in affiliates.

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  Explanation

  Cash flows from investments in joint ventures and affiliates and long-term investments in securities are components of cash flows from investing activities.

• Question 3083:

  Consider the following information for Magical Interactions, Inc.

  Based on the assumptions above, which of the following statements is TRUE?

  A. The stock is undervalued.
  B. If the earnings retention rate increases, the value of the stock will increase (all else equal).
  C. If management can increase the EBITDA ratio by only 1.0%, the stock will be properly priced (all else equal).
  D. If inflation expectations decrease, the value of the stock will increase (all else equal).
  D. If inflation expectations decrease, the value of the stock will increase (all else equal).

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  Explanation

  The expected inflation rate is a component of ke (through the nominal risk free rate). ke is one component of the P/E ratio and can be represented by the following: nominal risk free rate + stock risk premium, where nominal risk free rate = [(1

  + real risk free rate) * (1 + expected inflation rate)] ?1. The other statements are false. To determine the stock over/under valuation, we need to calculate both the P/E ratio and the EPS.

  The P/E ratio = Dividend Payout Ratio / (ke?g),

  EPS = [(Per share Sales Estimate) * (EBITDA%) ?D (per share) ?I (per share)] * (1 - t)

  = [($150 * 0.18) - $15 - $10] * (1 ?0.35) = $1.30

  Value of stock = EPS * P/E = 7. 14 * $1.30 =$9.30

  Since the market value of the stock is greater than the estimated value, the stock is overvalued.

  An increase in earnings retention will likely decrease the P/E ratio. The logic is as follows: Because earnings retention impacts both the numerator (dividend payout) and denominator (g) of the P/E ratio, the impact of a change in earnings

  retention depends upon the relationship of ke and ROE. If the company is earning a lower rate on new projects than the rate required by the market (ROE < ke), investors will likely prefer that the company pay dividends (absent tax concerns).

  Investors will likely value the company lower if it retains a higher percentage of earnings.

  If management increases EBITDA by 1.0%,the stock will be undervalued.

  EPS = [($150 * 0.19) - $15 - $10] * (1 ?0.35) = $2. 28

  Value of stock = EPS * P/E = 7. 14 * $2. 28 = approximately$16. 30, which is greater than the market value.

  Note: the EBITDA % that equates to the market price is approximately 18.5%, or a 0.5% increase. Small changes in EBITDA% have a large impact on the EPS and thus on the estimated stock value.

• Question 3084:

  How many deposits of $250 a month, beginning next month, are needed before an account has $200,000 in it, assuming it had a balance of $0 at the beginning and that interest is 6% per year, compounded monthly?

  A. 319.48
  B. No solution/Error
  C. 322. 69
  D. 800.00
  E. 66. 79
  C. 322. 69

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  Explanation

  One of the two dollar amounts must be entered as a negative number and the other as a positive number or an error will result. On the BAII Plus, press 6 divide 12 = I/Y, 0 PV, 250 PMT, 200000 +/- FV, CPT N. On the HP12C, press 6 ENTER 12 divide i, 0 PV, 250 PMT, 200000 CHS FV, n. Note that the HP12C returns a result of 323. Make sure the BAII Plus has the P/Y value set to 1.

• Question 3085:

  The following data have been extracted from the financial statements of a firm for two years, 1991 and 1992:

  1991 1992 Assets 9,947 9,682 Sales 11,035 10,377 Current liabilities 4,193 3,920 Non-current liabilities 3,827 3,476

  The asset turnover and the equity turnover for 1992 equal ________.

  A. 0.98, 2. 56
  B. 1.06, 4. 93
  C. 2. 11, 3. 92
  D. 1.34, 6. 38
  B. 1.06, 4. 93

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  Explanation

  Total asset turnover = net sales/average total assets

  Total equity turnover = net sales/average equity

  The total liabilities in 1991 = 4,193 + 3,827 = 8,020 and total liabilities in 1992 = 3,920 + 3,476 = 7,396. Therefore, using the equation, Total Assets = Total Liabilities + Total Equity,

  the equity in 1991 was 9,947 - 8020 = 1,927 and in 1992, it was 9,682 - 7,396 = 2,286. Thus, the average equity for 1992 equals (1,927 + 2,286)/2 = 2,107 and average assets for 1992 equal (9,682 + 9,947)/2 = 9,815. Therefore, asset

  turnover for 1992 = 10,377/9,815 = 1.06 and equity turnover = 10,377/2,107 = 4. 93.

• Question 3086:

  Peterborough's capital structure was as follows:

  Dec. 31, 1995 Dec. 31, 1996 Outstanding shares of stock: Common $110,000 $110,000 Convertible preferred $10,000 $10,000 8% convertible bonds $1,000,000 $1,000,000

  During 1996, Peterborough paid dividends of $3. 00 per share on its preferred stock. The preferred shares are convertible into 20,000 common shares and are considered common stock equivalents. The 8% bonds are convertible into 30,000 common shares but are not considered common stock equivalents. Net income for 1996 was $850,000. Assume that the income tax rate is 30%. The primary earnings per share for 1996 is ________.

  A. $7. 45
  B. $6. 31
  C. $6. 54
  D. $7. 73
  E. $7. 08
  C. $6. 54

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  Explanation

  As common stock equivalent (CSE), the preferred stock must be considered in the calculation of primary earnings per share (PEPS) and assumed to have no preferred dividends paid. PEPS is then $6. 54 ($850,000/ (110,000 + 20,000)).

• Question 3087:

  This shows the number of stocks advancing plus one-half the number unchanged, divided by the total number of issues traded.

  A. Odd-Lot, Short-Sales Theory
  B. Relative Trend
  C. Mutual Fund Cash Positions
  D. Diffusion Index
  E. Margin Debt
  F. Dow Theory
  G. Block Uptick-Downtick Ratio
  H. Short Sales by Specialists
  D. Diffusion Index

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  Explanation

  The diffusion index shows the daily total of stocks advancing plus one-half the number unchanged, divided by the total number of issues traded.

• Question 3088:

  Which of the following AIMR Standards states that the financial analyst must exercise diligence and thoroughness in making investment recommendations or taking investment actions?

  A. III B
  B. IV A.1
  C. I
  D. None of these answers
  B. IV A.1

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  Explanation

  Standard IV (A.1) - Reasonable Basis and Representations states: "Members shall exercise diligence and thoroughness in making investment recommendations or in taking investment actions."

• Question 3089:

  Which of the following statements is the best description of the ability of arbitrageurs to correct market anomalies?

  A. Only the more significant mispricing may be exploited while others are allowed to persist.
  B. There is a high degree of reliability that apparent mispricing will be corrected.
  C. Investors supply largely unlimited amounts of capital to arbitrageurs because of the reliability of the returns.
  A. Only the more significant mispricing may be exploited while others are allowed to persist.

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  Explanation

• Question 3090:

  Regarding beneficiaries and remaindermen, current life-income beneficiaries prefer to receive ________; remaindermen would rather have ________.

  A. a minimal current income; a high rate of current income
  B. small incremental principal repayments; predictable current income
  C. none of these answers
  D. growth and stability of principal; a high rate of current income
  C. none of these answers

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  Explanation

  None of these choices is the correct answer. Current life-income beneficiaries prefer to receive high rate of current income, while remaindermen would rather have growth and stability of principal.