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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3251:

  Another name for flexible exchange rates is:

  A. none of these answers.
  B. all of these answers.
  C. floating exchange rates.
  D. moveable exchange.
  E. freely determined exchange.
  C. floating exchange rates.

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  Explanation

  Flexible exchange rates, also called floating exchange rates, are determined by market forces.

• Question 3252:

  In a regression, the independent variable explains 79% of the variance in the dependent variable, leaving 21% unexplained. The slope coefficient is 0.67 and the intercept equals -10.2 The correlation coefficient between the two variables is A. 0.21

  B. 0.89

  C. 0.31

  D. -0.79

  Correct Answer. B
  B

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  Explanation

  In a univariate regression, the correlation coefficient between the dependent and the independent variables equals the square root of R-square. However, you should also be careful about the sign, which is not given by the R-square. Rather, you have to look at the sign of the slope coefficient. In this case, the slope coefficient is positive, implying that the dependent and the independent variables are positively correlated. The R-square equals 79% so the correlation coefficient equals +sqrt(0.79) = 0.89.

• Question 3253:

  Studies have found that the confidence index

  A. has been moderately useful for predicting stock price movements.
  B. has not been very useful for predicting stock price movements.
  C. has been very useful for predicting stock price movements.
  D. has varied more or less logarithmically with stock index values.
  B. has not been very useful for predicting stock price movements.

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  Explanation

  Many technical analysts believe that the confidence index accurately reflects investors' attitudes toward financial markets. They view it as a useful way to follow the "smart money" on Wall Street. Yet several studies have found that the index is not very useful for predicting stock price movements.

• Question 3254:

  A stock has a beta of 0.27 and the risk-free rate is 6. 15%. Its dividend growth rate is 4. 11% and its P/E ratio is 8.9. If the firm has a dividend payout ratio of 23%, the market risk premium equals ________.

  A. 13. 65%
  B. 10.23%
  C. 2. 00%
  D. 11.82%
  C. 2. 00%

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  Explanation

  If the expected return on the stock is K, then the Dividend Discount Model gives

  P/E = (dividend payout ratio)/(K - g). Therefore, K = g + (div. payout ratio)/(P/E) = 0.0411 + 0.23/8.9 = 6. 69%. Now, CAPM implies that the expected return on a stock equals the risk-free rate plus beta times the market premium. Hence, 6. 69%

  = 6. 15% + 0.27 * market premium, giving market premium = (6. 69% - 6. 15%)/0.27 = 2. 00%.

• Question 3255:

  The Oneonta Chemical Company is evaluating two mutually exclusive pollution control systems. Since the company's revenue stream will not be affected by the choice of control systems, the projects are being evaluated by finding the PV of each set of costs. The firm's required rate of return is 13 percent, and it adds or subtracts 3 percentage points to adjust for project risk differences. System A is judged to be a high-risk project (it might end up costing much more to operate than is expected). System A's risk-adjusted cost of capital is

  A. 16 percent; since A is more risky, its cash flows should be discounted at a higher rate, because this correctly penalizes the project for its high risk.
  B. indeterminate, or, more accurately, irrelevant, because for such projects we would simply select the process that meets the requirements with the lowest required investment.
  C. 13 percent; the firms cost of capital should not be adjusted when evaluating outflow only projects.
  D. somewhere between 10 percent and 16 percent, with the answer depending on the riskiness of the relevant inflows.
  E. 10 percent; this might seem illogical at first, but it correctly adjusts for risk where outflows, rather than inflows, are being discounted.
  E. 10 percent; this might seem illogical at first, but it correctly adjusts for risk where outflows, rather than inflows, are being discounted.

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  Explanation

  k(A) = 13% - 3% = 10%. If the cash flows are cost only outflows, and the analyst wants to correctly reflect their risk, the discount rate should be adjusted downward (in this case by subtracting 3 percentage points) to make the discounted flows comparatively larger.

• Question 3256:

  Willa Dowd collected the following information for a small-cap firm that she is evaluating:

  Stock price per share $20.50 Expected sales $920 million Operating expenses (excluding interest) $405 million Depreciation amortization $44 million Return on equity (ROE) 12% Shares outstanding 31 million Common shareholders' equity $380 million

  The Price/Cash Flow (P/CF) for the small-cap firm is closest to:

  A. 7. 1. B. 8.5.
  C. 9.1.
  A. 7. 1. B. 8.5.

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  Explanation

• Question 3257:

  Which of the following is/are true about the Central Limit Theorem?

  I. It cannot be applied if the population distribution is non-normal.

  II. It cannot be applied if the population distribution is highly skewed.

  III.

  It implies that the mean of the population equals the mean of the means of all possible samples.

  A. II only
  B. I only
  C. I and III
  D. III only
  E. I and II
  F. I, II, and III
  D. III only

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  Explanation

  The Central Limit Theorem states that for a population with mean M and variance S, a sample of large size n has a sampling distribution of mean which is approximately normal with mean M and variance S/n.

• Question 3258:

  If the overall price trend of the market has been down, the moving-average line would generally lie ________ current prices.

  A. can't be determined without further information
  B. below
  C. on
  D. above
  D. above

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  Explanation

  Moving averages lag current trends because data used to calculate moving averages is from recent past.

• Question 3259:

  The "degree of leverage" concept is designed to show how changes in sales will affect EBIT and EPS. If a 10 percent increase in sales causes EPS to increase from $1.00 to $1.50, and if the firm uses no debt, then what is its degree of operating leverage?

  A. 4. 2
  B. 3. 6
  C. 4. 7
  D. 5. 0
  E. 5. 5
  D. 5. 0

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  Explanation

  These two equations could be used:

  DTL = (DOL)(DFL).

  EPS(1) = EPS(0)[1 + (DTL)(%Change Sales)].

  Note that EPS rises by 50 percent, from $1.00 to $1.50, on a 10 percent increase in sales, so

  1.50 = 1.00[1 + (DTL)(0.1)]

  1.50 = 1 + 0.1 DTL

  0.1 DTL = 0.50

  DTL = 5. 00.

  Now DTL = 5 = (DOL)(DFL)

  But if Debt = 0, then DFL = 1, so DOL = DTL = 5. 0.

• Question 3260:

  A market analyst is examining the financial performance of a large pharmaceutical firm, and has assimilated the following information:

  Adjusted operating profits before taxes: $26,700,000 Cash operating taxes: $9,000,000 Cost of capital: 14. 5% per year Total capital employed: $127,000,000

  Using this information, what is the Economic Value Added for this large pharmaceutical firm? Further, should the management of this Company be considered to have created value for shareholders?

  A. None of these answers is correct.
  B. $611,354; management has created economic value
  C. $611,354; management may have created economic value
  D. ($715,000); management has not created economic value
  E. ($715,000); management has created economic value
  F. $715,000; management has created economic value
  D. ($715,000); management has not created economic value

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  Explanation

  Economic Value Added, a value-based measure of economic profit, is a registered trademark of Stern, Stewart and Company. The equation used to calculate EVA is as follows:

  EVA = {Net Operating Profits Less Adjusted Taxes - [Total Capital Employed * (Cost of Capital)]}.

  In this case, the NOPLAT figure must be calculated manually by subtracting the Cash Operating Taxes from the Adjusted Operating Profit before Tax (AOPBT) figure. Doing so will produce an answer of $17,700,000 for the Net Operating

  Profit Less Adjusted Taxes figure. Now that the necessary information has been determined, the calculation of EVA is as follows:

  EVA = {$17,7000,000 - ($127,000,000 * 0.145)} = ($715,000)

  A negative EVA calculation indicates that management has failed to provide economic profits to shareholders, as evidenced by the fact that the opportunity cost of capital employed is less than the AOPAT figure. In this example, the

  management of Intelligent Semiconductor should be considered as having failed to provide shareholder value. The calculation of Adjusted Operating Profit Before Taxes (AOPBT), and Cash Operating Taxes are important. The calculation of

  AOPBT is as follows:

  Operating profit (after depreciation and amortization) + Implied interest on operating leases + any increase in the LIFO reserve + goodwill amortization = Adjusted Operating Profit Before Taxes.

  Cash Operating Taxes, another important component of EVA, is calculated as follows:

  Cash Operating Taxes = Income Tax Expense + tax benefit from interest expenses + tax benefit from interest on leases + taxes on non-operating income

  Adjusted Operating Profit Before Taxes minus Cash Operating Taxes = Net Operating Profit Less

  Adjusted Taxes (NOPLAT). Subtracting the dollar cost of capital from the NOPLAT figure will yield the EVA.