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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 301:

  Mr. and Mrs. Jones live in a neighborhood where the mean family income is $45,000 with a standard deviation of $9,000. Mr. and Mrs. Smith live in a neighborhood where the mean is $100,000 and the standard deviation is $30,000. What is the relative dispersion of the family incomes in the two neighborhoods?

  A. Jones 20%, Smith 30%
  B. Jones 50%, Smith 33%
  C. None of these answers
  D. Jones 40%, Smith 20%
  E. Jones 30%, Smith 20%
  A. Jones 20%, Smith 30%

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  Explanation

  The coefficient of variation = (s*100)/mean. Jones: 9000*100/45,000 = 20%. Smith: 30,000*100/100,000 = 30%.

• Question 302:

  SandP 500 sales have been estimated at $723 per share while the operating profit margin has been estimated at 16. 6%. The average tax rate on SandP 500 companies is about 40%, with an average depreciation of 4. 7% and an interest expense of 1.3%, all expressed as a percentage of sales. The average payout ratio on SandP 500 is 17%. Assuming a 2. 8% growth rate in the economy and an investor demand of 12% return on equity, the per share SandP 500 must be valued at:

  A. $123. 22
  B. $87. 34
  C. $79.11
  D. $84. 96
  B. $87. 34

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  Explanation

  operating profits = Earnings before depreciation, interest and taxes = EBDIT and operating profit margin = EBDIT/net sales. Therefore, net income/sales = (EBDIT/sales - depreciation/sales - interest/sales)*(1-tax rate) = (16. 6% - 4. 7% - 1.3%)*

  (1-40%) = 6. 36%.

  Thus, earnings = 6. 36% * 723 = $45. 98 per share.

  In the usual notation, the Dividend Discount Model gives Po = D1/(k-g). In this case, g = 2. 8% and the expected dividend per share next year = 45. 98 * 17%*(1+2. 8%) = $8.04 per share. Therefore, Po = 8.04/(12% - 2. 8%) = $87. 34 per share.

• Question 303:

  A project has a high correlation with the firm's other projects. It also has a low CAPM beta. The project will have ________ corporate risk and ________ market risk.

  A. high; high
  B. high; low
  C. low; low
  D. low; high
  B. high; low

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  Explanation

  Corporate risk measures the impact of a project on the corporate earnings while market risk measures its effect on the systematic risk of the stock. Since the project's returns are highly correlated with those of the firm's other projects, it will increase the earnings volatility. At the same time, due to low beta, the project will have a low market risk.

• Question 304:

  The value of a preferred stock is the stated ________ divided by the required rate of return on the preferred stock.

  A. monthly portfolio return
  B. monthly value estimate
  C. annual dividend
  D. daily dividend
  C. annual dividend

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  Explanation

  The value of preferred stock is the stated annual dividend divided by the required rate of return on preferred stock.

• Question 305:

  What monthly payment is required over the next 48 months to pay off a $10,000 debt today, if interest is charged at 14% per year, compounded monthly?

  A. $366. 67
  B. $250.54
  C. $104. 54
  D. $273. 26
  E. $116. 02
  D. $273. 26

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  Explanation

  On the BAII Plus, press 48 N, 14 divide 12 = I/Y, 10000 PV, 0 FV, CPT PMT. On the HP12C, press 48 n, 14 ENTER 12 divide i, 10000 PV, 0 FV, PMT. Make sure the BAII Plus has the P/Y value set to 1.

• Question 306:

  If two events A and B are mutually exclusive, what does the special rule of addition state?

  A. P(A and/or B) = P(A) +P(B)
  B. P(A and B) = P(A) + P(B)
  C. None of these answers
  D. P(A or B) = P(A) - P(B)
  E. P(A or B) = P(A) + P(B)
  E. P(A or B) = P(A) + P(B)

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  Explanation

  The key word is that these events are mutually exclusive. So P(A or B) = P(A) + P(B). The probabilities stand alone.

• Question 307:

  A firm has a dividend payout ratio of 70% and it earns a 10% per year return on its equity. Calculate the expected annual growth rate of the firm's dividends?

  A. Not able to compute with the above data.
  B. 7%
  C. 8%
  D. 3%
  D. 3%

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  Explanation

  g=(RR)(ROE)=0.3*0.10=3%.

• Question 308:

  Given the following points: (-2, 0), (-1,0), (0,1), (1, 1) and (2, 3)

  What is the critical value necessary to determine a confidence interval for a 90% level of confidence?

  A. 1.638
  B. 1.533
  C. None of these answers
  D. 2. 132
  E. 2. 353
  E. 2. 353

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  Explanation

  Look at the t tables for n-2 degrees of freedom at the 10% level. Here, we look for a two tailed test with 5-2 = 3 degrees of freedom. This is 2. 353.

• Question 309:

  If you deposit $1,500 into an account paying 6% per year, compounded quarterly, how much is in the account after 60 months?

  A. $2,224. 46
  B. $2,117. 54
  C. $2,020.28
  D. $1,702. 48
  E. $1,751.59
  C. $2,020.28

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  Explanation

  There are 20 quarters in 60 months (60 divide 3 =). On the BAII Plus, press 20 N, 6 divide 4 = I/Y, 1500 PV, 0 PMT, CPT FV. On the HP12C, press 20 n, 6 ENTER 4 divide i, 1500 PV, 0 PMT, FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 310:

  When prices are rising, which of the following inventory valuation methods produces a higher ending inventory value?

  A. LIFO
  B. FIFO
  C. None of these answers
  D. Average cost
  B. FIFO

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  Explanation

  When prices are rising, FIFO will produce the highest ending inventory value because the first in (lowest cost) inventory is the first out. This leaves the most recently purchased inventory on hand and since it was purchased at higher prices, it has the highest cost and ending inventory will have the greatest value.