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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3151:

  Following is a graph of the Industry Life Cycle with the names of the phases omitted.

  

  Using the graph above, which of the following choices is CORRECT?

  A. To value a firm in Phase B, an analyst should use the infinite period dividend discount model (DDM).
  B. Competition most likely intensifies in Phase B.
  C. During Phase E, industry growth rates approach that of the economy.
  D. The P/E ratio for a company in Phase D is approximated by 1/ke.
  D. The P/E ratio for a company in Phase D is approximated by 1/ke.

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  Explanation

  Phase D represents the Stabilization and Market Maturity Phase. Corporate finance shows that a mature company has a return on equity (ROE) approximately equal to the required rate of return, ke. Then, the formula: P/E = (dividend payout) / (ke?retention rate * ROE) becomes = (1 ?retention rate) / (ke?retention rate * ke) = 1/ke The other statements are incorrect. The infinite period dividend discount model is most likely not appropriate for a firm in Phase B, which represents the rapid accelerating growth phase (the multi-stage model is best). Remember that the infinite period DDM is most useful for a company with the following assumptions: Phase B, the Rapid Accelerating Growth phase, is characterized by limited competition and very high sales and profit margin growth. Companies in this phase likely have supernormal growth. Competition increases in Phase C, the mature growth phase. The industry growth rates approach that of the economy in Phase D, Stabilization and Market Maturity. Phase E is the Deceleration of Growth and Decline phase. During this phase, demand shifts away from the industry and growth of substitute products may cause growth rates to be negative.

• Question 3152:

  A statistician has framed his hypothesis testing problem as:

  Ho: mean = 100 H1: mean < 100

  Specify the region for the p-statistic which will lead to the rejection of the null at the 80% significance level.

  A. z-statistic < -0.84
  B. z-statistic > +1.19
  C. z-statistic < -1.35 or z-statistic > +1.35
  D. z-statistic < -1.645
  A. z-statistic < -0.84

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  Explanation

  Since the alternative is directional and to the left, we use a left-tailed test. For this, the critical value at 80% level is -0.84. -0.84 is the value above which 80% of the probability mass of the standard normal distribution lies). The rejection region is then given by z-statistic < -0.84.

• Question 3153:

  An investor had invested in 50 shares of firm Z at the beginning of the year, when the stock price was $56 per share. On September 18th, the stock underwent a 3-for-2 split. At year-end, the stock price stood at $38. The investor realized a return of 17% during the year. His total dividend income during the year was:

  A. $284
  B. $517
  C. $426
  D. $639
  C. $426

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  Explanation

  When the stock split, the investor was left with 50 * 3 / 2 = 75 shares. Hence, the year-end portfolio value equaled 75 * 38 = $2,850. The original amount invested was equal to 50 * 56 = $2,800. Since the investor realized a return of 17%, his

  total value inclusive of dividends at year-end was 2,800 * 1.17 = $3,276.

  Therefore, the dividend income during the year was 3,276 - 2,850 = $426.

• Question 3154:

  Which of the following statements about investment companies is false?

  A. The 12b-1 plan allows funds to deduct up to 1.25% of average assets per year to cover marketing expenses.
  B. Closed end investment companies trade at the net asset value of the shares.
  C. The fund's net asset value is the prevailing market value of all the fund's assets divided by the number of fund shares outstanding.
  D. The typical management fees charged to compensate the Management Company for the expense of running the fund are between ?and 1% of the fund's net asset value.
  B. Closed end investment companies trade at the net asset value of the shares.

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  Explanation

  Closed end funds sell for whatever people will pay for them. CE funds typically sell at premiums or discounts from their NAV.

• Question 3155:

  An increase in the dividend payout ratio ________ the retained earnings break-point.

  A. decreases
  B. increases or decreases, depending on the tax rate
  C. increases
  D. does not affect
  A. decreases

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  Explanation

  As the dividend payout ratio is increased, the amount of earnings retained decreases, decreasing the amount of new debt that can be issued without changing the capital structure. Hence, the retained earnings breakpoint will decrease.

• Question 3156:

  The primary mechanism for motivating venture capitalists is

  A. allowing a high ownership stake in the venture.
  B. permitting certain types of self-dealing.
  C. to have finite life funds.
  D. the carried interest paid to them.
  D. the carried interest paid to them.

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  Explanation

  Carried interest is calculated over and above some assumed base level of return to investors and the amount paid is usually approximately 20 percent of the portfolio gains.

• Question 3157:

  Joel Franklin, CFA, has just been promoted to junior portfolio manager for a large equity portfolio at Davidson-Sherman (DS), a large multinational investment banking firm. He is specifically responsible for the development of a new investment strategy that DS wants all equity portfolios to implement. DS has decided to begin overlaying option strategies on all equity portfolios. The reason for this decision is the relatively poor performance of many of their equity portfolios. They look at the option strategies as an opportunity to add value or reduce risk. Franklin recognizes that the behavior of an options value is dependent on many variables and decides to spend information shown in Exhibit's 1 and 2 for European style options.

  

  

  Joel recognizes that his software only includes the valuation information for European style options. He wants to know how the premium of an American style option compares with its European counterpart. Which of the following is TRUE? The premium of the American option:

  A. the same or lower.
  B. strictly higher.
  C. the same or higher.
  D. strictly lower.
  C. the same or higher.

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  Explanation

  The owner of a European option may exercise it only at expiration whereas an American option can be exercised at any time before or at expiration. Therefore, an American option cannot be worth less than a European option.

• Question 3158:

  Which of the following is the correct formula for the breakdown of ROE?

  A. Profit Margin x Total Assets x Financial Leverage
  B. Profit Margin x Total Asset Turnover x Financial Leverage
  C. P/E x Earnings per share x Number of Shares Outstanding
  D. COGS x Total Asset Turnover x Current Liabilities
  B. Profit Margin x Total Asset Turnover x Financial Leverage

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  Explanation

  By definition: ROE = Profit Margin x Total Asset Turnover x Financial Leverage

• Question 3159:

  Standard IV (A.3) relates to two major components and is titled Independence and ________.

  A. Objectivity
  B. None of these answers
  C. Impartiality
  D. Autonomy
  E. Justice
  A. Objectivity

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  Explanation

  Standard IV (A.3) - Independence and Objectivity, states that members shall use reasonable care and judgment to achieve and maintain independence and objectivity in making investment recommendations or taking investment action.

• Question 3160:

  A firm is purchased for more than the fair market value of its assets. The excess is:

  A. written off against the retained earnings on the balance sheet.
  B. treated as an extraordinary loss and presented net of taxes on the income statement.
  C. considered as "Goodwill."
  D. considered a "premium paid" and amortized over the life of the acquired assets.
  C. considered as "Goodwill."

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  Explanation

  Goodwill is defined as the price paid in excess of the fair market value of the assets of the target firm. Under US GAAP, only Goodwill generated during acquisitions is capitalized; it does not allow capitalization of internally generated Goodwill. The capitalized Goodwill is amortized over a period which can range from a few years to as long as 40 years.