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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3211:

  An insurance agent has appointments with four prospective clients tomorrow. From past experience the agent knows that the probability of making a sale on any appointment is 1 out of 5. Using the rules of probability, what is the likelihood that the agent will sell a policy to 3 of the 4 prospective clients?

  A. 0.410
  B. None of these answers
  C. 0.250
  D. 0.026
  E. 0.500
  D. 0.026

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  Explanation

  This is a binomial probability. The probability of getting r successes out of n trials where the probability of success each trial is p and probability of failure each trial is q (where q = 1-p) is given by: n!(p^r)[q^(n-r)]/r!(n-r)!. Here n = 4, r = 3,p =

  0.20 and q = 0.80. Therefore we have 4!(0.2^3)(0.8^1)/3!1! = 0.026.

• Question 3212:

  Ace Consulting, a corporate finance consulting firm, is examining the operating performance and asset structure of Clay Industries. In their analysis, Ace has identified the following information for the most recent reporting period: EBIT $500,590 Sales $988,000 Interest paid $40,800 Given this information, what is the Degree of Financial Leverage for Clay Industries?

  A. 0.567
  B. 0.465
  C. 1.974
  D. None of these answers is correct.
  E. The Degree of Financial Leverage cannot be calculated from the information provided.
  F. 2. 149
  D. None of these answers is correct.

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  Explanation

  To calculate the DFL, the financial analyst needs to determine the EBIT and interest paid for a predetermined time period. To calculate the Degree of Financial Leverage, the following equation is used: {EBIT/[EBIT - interest paid]}. Incorporating the given information into this equation yields the following: {$500,590/[$500,590 - $40,800]}= 1.089. The annual sales figure is not necessary in the calculation of DFL. Additionally, remember that the DFL figure is always greater than one, therefore the first and fourth answers can be eliminated as possibilities by observation alone.

• Question 3213:

  Which of the following correctly illustrates the infinite period dividend discount model?

  A. D1 = V * (k - g)
  B. None of these answers is correct.
  C. V = (D1 / k) + g
  D. V = D1 / (1 + r)
  E. V = D0 / (k - g)
  F. (k-g) = V * r / D1
  A. D1 = V * (k - g)

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  Explanation

  The infinite dividend discount model assumes can be used to value a common stock when dividends are expected to grow at a constant rate. The equation which characterizes the infinite period dividend discount model is as follows: Value of common stock = D1 / (k - g)

  Where: D1 = the dividend at t1, k = the required rate of return, and g = the assumed growth rate of dividends.

  The equation illustrated in choice D is simply an algebraic rearrangement of this equation, solving for D1.

• Question 3214:

  Standard III (A) states that members notify their ________ of the Code and Standards. This notification must be done ________.

  A. nearest Society secretary; within 45 days of candidacy
  B. immediate supervisor; in writing
  C. nearest Society secretary; orally or in writing
  D. chief operating officer (or equivalent); in writing
  E. chief operating officer (or equivalent); orally or in writing
  F. immediate supervisor; orally or in writing
  G. immediate supervisor; within 45 days of candidacy
  H. any of these answers is acceptable; as long as the notification is made
  B. immediate supervisor; in writing

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  Explanation

  Standard III (A): Relationship with and Responsibilities to the Employer, states that: "Members shall inform their employer, in writing, through their direct supervisor, that they are obligated to comply with the Codes and Standards and are subject to disciplinary sanctions for violations thereof."

• Question 3215:

  Standard V (A) is known as ________.

  A. Prohibition against Use of Material Nonpublic Information
  B. Duty to Employer
  C. Preservation of Confidentiality
  D. Interactions with Clients and Prospects
  E. None of these answers
  F. Investment Process
  G. Fair Dealing
  H. Professional Misconduct
  A. Prohibition against Use of Material Nonpublic Information

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  Explanation

  Standard IV (A) deals with the Investment Process. Standard III (B) deals with Duty to Employer. Standard IV (B.3) deals with Fair Dealing. Standard IV (B) deals with Interactions with Clients and Prospects. Standard V (A) deals with Prohibition against Use of Material Nonpublic Information. Standard IV (B.5) deals with Preservation of Confidentiality. Standard II (B) deals with Professional Misconduct.

• Question 3216:

  Convertible and other hybrid securities

  A. are never included in composites with conventional securities.
  B. are managed separately and treatment must be disclosed in performance reporting.
  C. are not assets to which the Standards are applicable.
  D. must be treated consistently across and within composites.
  D. must be treated consistently across and within composites.

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  Explanation

  Convertible and other hybrid securities must be treated consistently across and within composites. Portfolios must not be switched from one composite to another unless documented changes in client guidelines make switching appropriate. This is a requirement for creation and maintenance of composites.

• Question 3217:

  Suppose you are modeling long-term interest rates, and you believe that supply of corporate debt is a major contributing factor. Suppose you believe that the probability that rates will rise if supply of corporate debt rises is 60%; if the supply of corporate debt stays constant, you believe that there is a 35% chance of increasing interest rates; if the supply of corporate debt falls, you believe that there is a 5% chance of rates increasing. You think that the likelihood of corporate debt increasing is 50%; of staying the same is 40%; of dropping is 10%. What is the unconditional probability of interest rates rising?

  A. 55. 4%.
  B. 44. 4%.
  C. 44. 5%.
  D. 55. 5%.
  C. 44. 5%.

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  Explanation

  We use the total probability rule: P(A), the unconditional probability, = P(A|S_1)*P(S_1) + P(A|S_2) *P(S_3) + P(A|S_3) *P(S_3), where the S_i represent mutually exclusive and exhaustive events. So the likelihood of interest rates increasing is 0.60 * 0.50 + 0.35 * 0.40 + 0.05 * 0.10 = 0.30 + 0.14 + 0.005 = 0.445.

• Question 3218:

  A firm's operating cash flow is overstated by 90. Its non-cash expenses were correctly stated, noncash revenues were overstated by 55 and a total of 35 went into reducing outstanding current debt. The firm's tax rate is 40%. Then, the firm's

  net income is ________.

  A. overstated by 55
  B. overstated by 20
  C. understated by 55
  D. correctly stated
  D. correctly stated

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  Explanation

  operating cash flow = net income + noncash expenses - non-cash revenues - cash reductions in operating accounts

• Question 3219:

  The GDP measures:

  A. the total value of all goods, services and financial transactions during a period.
  B. the total value of all the earnings in the economy.
  C. the total value of all goods and services produced in the economy during a period.
  D. the total value of all final goods and services produced in the economy during a period.
  D. the total value of all final goods and services produced in the economy during a period.

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  Explanation

  Note that the phrase "final goods" is critical. Intermediate goods are ignored in the calculation of GDP, as are all financial transactions. Further, since earnings look at net profits on goods and services but subtract out the employee salaries, for one, a sum of the earnings in an economy will significantly underestimate GDP.

• Question 3220:

  Stephanie Dell is evaluating two stocks (X and Y) using the capital asset pricing model. Dell predicts that the betas for the two stocks will be identical, but that the unsystematic risk for Stock X will be much higher than for Stock Y. Using the capital asset pricing model, determine which of the following statements is correct.

  A. Stock X will have a higher expected return than Stock Y, but a standard deviation less than or equal to Stock Y.
  B. Stock X will have a higher standard deviation than Stock Y, but an expected return less than or equal to Stock Y.
  C. Both the expected return and standard deviation for Stock X will be higher than Stock Y.
  B. Stock X will have a higher standard deviation than Stock Y, but an expected return less than or equal to Stock Y.

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  Explanation