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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3201:

  An analyst uses a temporary supernormal growth model to value a common stock. The company paid a $2 dividend last year. The analyst expects dividends to grow at 15% each year for the next three years and then to resume a normal rate of 7% per year indefinitely. The analyst estimates that investors require a 12% return on the stock. The value of this common stock is closest to:

  A. $48.
  B. $53.
  C. $71.
  B. $53.

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  Explanation

• Question 3202:

  A study of the scores on an in-plant course in management principles and the years of service of the employees enrolled in the course resulted in these statistics:

  Mean test score was 200 with a standard deviation of 40

  Mean number of years of service was 20 years with a standard deviation of 2 years

  In comparing the relative dispersion of the two distributions, what are the coefficients of variation (CV)?

  A. Test 50%, service 60%
  B. Test 35%, service 45%
  C. Test 100%, service 400%
  D. Test 20%, service 10%
  E. None of these answers
  D. Test 20%, service 10%

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  Explanation

  The respective CVs are found from (s*100)/mean. Test: 40*100/200 = 20% and Service: 2*100/20 = 10%.

• Question 3203:

  Which of the following statements about dividend policy and capital structure is TRUE?

  A. A person who believes in the clientele effect and a proponent of the "bird-in-hand" theory would have similar views on dividend payout policy.
  B. Investors view a stock repurchase as a positive signal and a stock issue as a negative signal.
  C. A diversified shareholder is most concerned with stand-alone risk.
  D. Monte Carlo simulation is used to estimate market risks; scenario analysis measures stand-alone risk.
  B. Investors view a stock repurchase as a positive signal and a stock issue as a negative signal.

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  Explanation

  Investors view a stock repurchase as a positive signal and a stock issue as a negative signal. A repurchase may mean that management believes the stock is undervalued. To understand why a stock issue is viewed negatively, consider the

  following circumstances: A biotech company has a new blockbuster drug that will increase its profitability, but to produce and market the drug, the company needs to raise capital. If the company sells new stock, then as sales (and thus profits)

  occur, the price of the stock will rise. The current shareholders will do well but not as well as they would have had the company not sold more stock before the share price increased. Thus, it is assumed that management will prefer to finance

  growth with non-stock sources.

  The other statements are false. A person who believes in the clientele effect and a proponent of the "bird-in-hand" theory would not have similar views on dividend policy. The clientele effect suggests that different groups of investors want

  different dividend levels (often based on tax status), and through the law of supply and demand, investors will select companies that meet their needs. Thus, dividend payout policy does not matter. According to the "bird-in-hand" theory,

  investors prefer dividends to capital appreciation because they view the former (D1/ P0) as less risky than the latter (g, or growth rate). Stand-alone risk is the company's individual, or unique, risk. An undiversified shareholder is concerned

  with stand-alone risk. A diversified shareholder is most concerned about undiversifiable, or systematic, risk. Both Monte Carlo simulation and scenario analysis are used to estimate stand-alone risk.

• Question 3204:

  Mirabelle is an experienced analyst who has worked for the investment research arm of Clifford and Clifford, Inc. for the past 7 years. Recently, TransOmega retained Clifford and Clifford to conduct a study on possible takeover candidates in the aviation industry. Mirabelle has been given the project and two assistants to conduct the research. During their review, Mirabelle's assistants located a research report created recently by Donaldson, a freelance analyst. Mirabelle found the report thorough, though she did not agree with many of Donaldson's conclusions. She carried out further inquiry along those lines and modified the report with new conclusions. She showed the completed report, with proper attributions to Donaldson in places where she had used his results, to a senior partner, John Cliff of Clifford and Clifford. The report was approved and released to TransOmega. In this case,

  A. both Mirabelle and John Cliff violated the standards.
  B. only Mirabelle violated the plagiarism standard by using Donaldson's report.
  C. only John Cliff violated the Standard of Reasonable Care (IVA.1) by not adequately monitoring Mirabelle.
  D. neither Mirabelle nor John Cliff violated any of the standards.
  D. neither Mirabelle nor John Cliff violated any of the standards.

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  Explanation

  Since proper care was taken at all steps, no violation has occurred. The use of Donaldson's report is acceptable as long as proper acknowledgments are given.

• Question 3205:

  If the sample variance for a frequency distribution consisting of hourly wages was computed to be 10, what is the sample standard deviation?

  A. $3. 16
  B. None of these answers
  C. $1.96
  D. $4. 67
  E. $10.00
  A. $3. 16

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  Explanation

  Sample standard deviation is the square root of the sample variance.

• Question 3206:

  The date on which a firm's directors issue a statement declaring a dividend is known as ________.

  A. Ex-Dividend Date
  B. Declaration Date
  C. Payment Date
  D. Dividend Date
  E. Holder-of-Record Date
  B. Declaration Date

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  Explanation

  The date on which a statement is issued by a firm's directors declaring a dividend is known as the "Declaration Date."

• Question 3207:

  Due to an overheated economy and dramatic monetary stimulus, the U.S. inflation rate is anticipated to increase significantly from its current level. Specifically, the inflation rate is expected to increase from 3. 5% to 8% per year, and this increase should be considered significantly large by historical standards. The current nominal interest rate in the U.S., as measured by the quoted rate on U.S. 10-year notes, is 6. 75%. Further, the real inflation-free rate of interest is currently at 3. 25% per year, and this rate is not anticipated to change. Assuming this increase in inflation has not been factored in, what is the appropriate value for the nominal risk-free rate?

  A. 9.51% per year
  B. 10.85% per year
  C. 11.51% per year
  D. The answer cannot be calculated from the information provided.
  E. 11.25% per year
  F. None of these answers is correct.
  C. 11.51% per year

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  Explanation

  When either the real "inflation-free" interest rate or the expected inflation rate are significantly large, the nominal risk free rate is calculated using a different equation than that which is used for lower expected inflation rates. Specifically, the

  calculation of the nominal risk-free rate of interest when the inflation-free rate of interest and/or the inflation premium are significantly high, the calculation of the nominal risk-free rate is as follows:

  Nominal RFR = (1 + Real RFR)(1 + E(I)) - 1

  Where: Real RFR = the real inflation-free rate of interest and E(I) = the anticipated inflation rate,

  In this example, all of the necessary inputs have been provided. Imputing these values into the equation above will yield the following:

  Nominal risk-free interest rate = {[(1 + 0.0325)(1 + 0.08) - 1] * 100} = 11.51%

  When the inflation-free rate of interest and/or the inflation premium are low, then the equation above can be simplified to the following:

  Nominal RFR = Real RFR + Inflation premium.

  If you chose 11.25%, remember that when the real inflation-free rate of interest and/or the inflation premium are significantly large, the calculation of the nominal risk-free rate must involve a different equation than when these rates are small.

• Question 3208:

  Free cash flow is not

  A. cash flow that includes discretionary uses such as debt reduction.
  B. the measure of cash available to the firm for discretionary uses after making all required cash outlays.
  C. better to have a large sum of.
  D. defined as cash flow from operations minus all capital expenditures.
  E. a cash flow with one definition because of its several discretionary uses.
  E. a cash flow with one definition because of its several discretionary uses.

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  Explanation

  The definition of free cash flow varies widely, depending on how one defines required and discretionary uses.

• Question 3209:

  The procedures for compliance with Standard IV (B.8), Disclosure of Referral Fees, recommend that you disclose all referral agreements ________.

  A. at least orally
  B. any of these answers
  C. orally or in writing
  D. in writing
  D. in writing

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  Explanation

  Under Standard IV (B.8), members should disclose all agreements in order to be in compliance. Members should disclose, in writing, the existence and terms of any referral agreement to any client or prospective client as soon as the member learns that the client or prospective client has been referred by a firm receiving a referral fee.

• Question 3210:

  Anne Quincy took the short side of a forward contract on the SandP 500 Index three months ago in an attempt to hedge short-term changes in her index portfolio. The contract had a term of six months at the purchase date, a contract price of $ 1,221 and Mason Inc. as the counterparty. Quincy is now considering unwinding her short position using either a three-month Mason Inc. contract with a price of $1,220, a three-month JonesCo contract with a price of S1,219, or a three-month Redding Company contract with a price of $1,218. If Quincy wants to minimize credit risk, which of the following should she do? Take the long position in the contract with:

  A. JonesCo.
  B. Mason Inc.
  C. Redding Company.
  B. Mason Inc.

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  Explanation