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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3281:

  Assume the following information about a stock market series:

  Retention rate at t1 = 70%

  Expected growth rate of dividends at t1 = 8%

  Expected growth rate of earnings at t1 = 20%

  Required rate of return = 15%

  Given this information, what is the appropriate earnings multiplier for this stock market series? Further, what is the value of this series?

  A. 4. 29; $21.43
  B. 6. 00; $30.00
  C. 6. 00; $120.00
  D. The answer cannot completely be determined from the information provided.
  E. None of these answers is correct.
  F. 4. 29; $53. 63
  D. The answer cannot completely be determined from the information provided.

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  Explanation

  The answer cannot completely be determined from the information provided. Specifically, while the appropriate earnings multiplier can be found from the given information (and it is found as 4. 29), the correct value for the series cannot be determined without an estimation of EPS at t1. The following explains the derivation of the earnings multiplier for a stock market series.

  Estimating the earnings multiplier for a stock market series requires the estimation of each of the following components:

  1. The dividend payout ratio.

  2. The required rate of return on common stock in the country/region/industry/sector being analyzed.

  3. The expected growth rate of dividends for the stocks in the country/region/industry/sector being analyzed.

  Once values for each of these components have been determined, they are imputed into the following formula:

  {P/E = [D/E / (k - g)]}. Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at t1 [remember this is equal to (1 - the retention rate)], k = the required rate of return, and g = the anticipated growth rate of

  dividends.

  Had this example provided a figure for the EPS at t1, then the value of the index could be found by multiplying the EPS at t1 by the earnings multiplier. The earnings multiplier of 4. 29 is calculated as (1-Payout ratio)/(required rate of return-

  growth rate) = (1-.7)/(.15-.08) = 4. 29.

• Question 3282:

  An asset with a 10-year life has an acquisition cost of 5,000. The firm, using double declining method of depreciation has an accumulated depreciation of 2,440 at the end of year 3 (verify this!). The depreciation expense in year 4 is equal to ________.

  A. 467
  B. 630
  C. 512
  D. 731
  C. 512

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  Explanation

  The book value at the beginning of year 4 = 5,000-2,440 = 2,560. Then, depreciation expense in year 4 = 2/10*book value = 512.

• Question 3283:

  A market strategist for Churn Brothers Brokerage is trying to determine an EPS figure for a stock market series. In her analysis, this portfolio manager has determined the following:

  1. Regressing sales for the series against Nominal GDP, the sales figure for the index has been estimated at: $26. 44.

  2. Analyzing capacity utilization rates, foreign competition, rates of inflation and unit labor costs, the operating profit margin for the series has been determined to be 28%.

  3. Creating a time series based upon inputs such as levels of capital expenditures and PPandE turnover, next year's depreciation-per-share has been determined to be: $1.89.

  4. Creating a time series based upon levels of debt outstanding and prevailing debt yields, the interest expense for next year is determined to be: $0.94 per share.

  5. Coordinating his research with a legislative consultant, the corporate tax rate for this series has been estimated at: 36% Using this information, what is the EPS figure for this stock market series?

  A. The answer cannot be determined from the information provided.
  B. $3. 87
  C. None of these answers is correct.
  D. $3. 18
  E. $4. 82
  F. $2. 93
  F. $2. 93

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  Explanation

  All of the necessary information has been provided in this example. To determine the EPS for a stock market series, the following steps are necessary:

  Step 1: Estimate sales-per-share for the series:

  Step 2: Estimate operating profit margin for the series

  Step 3: Estimate the depreciation-per-share for next year

  Step 4: Estimate the interest expense-per-share for the next year

  Step 5: Estimate next year's corporate tax rate

  Once these five steps have been completed, the calculation of EPS for a stock market series is found by the following:

  EPS = [(Sales per share * Operating profit margin) - Depreciation-per-share - Interest Expense] * (1 - Corporate Tax Rate)

  The calculation of EPS for this stock market series is shown as follows:

  EPS = [($26. 44 * 0.28) - $1.89 - $0.94] * (1 - 0.36) = $2. 93

• Question 3284:

  If you buy a computer for $950 and agree to pay for it with 24 payments of $35 with the first payment occurring next month, what is the size of the final payment needed at month 24 to completely pay off the computer? Assume the interest rate you are being charged is 16% per year, compounded monthly.

  A. $294. 39
  B. $0.00
  C. $207. 88
  D. $87. 14
  E. $323. 18
  E. $323. 18

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  Explanation

  This question describes a situation often called a balloon payment. On the BAII Plus, press 24 N, 16 divide 12 = I/Y, 950 PV, 35 +/- PMT, CPT FV. On the HP12C, press 24 n, 16 ENTER 12 divide i, 950 PV, 35 CHS PMT, FV. The answer is shown as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 3285:

  Which of the following AIMR standards pertains to the responsibilities of supervisors?

  A. IV
  B. II C
  C. V
  D. None of these answers
  D. None of these answers

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  Explanation

  Responsibilities of Supervisors falls under Standard III (E).

• Question 3286:

  You are given a risk-free rate of 5% per year, a portfolio return of 15% per year, and a standard deviation of portfolio return of 16% per year. What is the Sharpe measure of risk-adjusted performance?

  A. 0.625.
  B. 0.675.
  C. 0.500.
  D. 0.750.
  A. 0.625.

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  Explanation

  The Sharpe measure of risk-adjusted performance is equal to (rbar_p - rbar_f)/sigma_p, where rbar_p is the mean portfolio return, rbar_f is the mean risk-free return, and sigma_p is the standard deviation of portfolio return. In our case, we have (15% - 5%) / 16% = 10/16 = 5/8 = 0.625.

• Question 3287:

  If alpha equals 0.05 for a two-tailed hypothesis test, how large is the area of rejection in the upper or right tail?

  A. 0.975
  B. 0.025
  C. 0.05
  D. 0.95
  E. None of these answers
  B. 0.025

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  Explanation

  If it is a two tailed test, then there is a similar size region in each tail. So 0.05/2 = 0.025.

• Question 3288:

  A stock has the following returns over 3 years: +2%, +15%, +25%. The annual geometric rate of return over the three years is ________.

  A. 7. 42%
  B. 19.36%
  C. 11.31%
  D. 9.34%
  E. 12. 21%
  F. 10.15%
  G. 14. 64%
  H. 13. 61%
  H. 13. 61%

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  Explanation

  The annual geometric rate of return equals [(1+2%)(1+15%)(1+25%)]^(1/3) - 1 = (1.02 * 1.15 * 1.25)^0.33 - 1 = 0.1361 = 13. 61%

• Question 3289:

  At the end of an accounting period, each expense that has been incurred but not yet paid should be recorded as

  A. a reversing entry
  B. an opening entry
  C. an adjusting entry
  D. a closing entry
  C. an adjusting entry

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  Explanation

  Expenses should be recognized in the period in which they are incurred. In order to be consistent with the matching principle, an adjusting entry must be made to record the expense, regardless of whether it has been paid.

• Question 3290:

  Suppose the inflation rate in the United States is expected to increase from 3% to 4. 25% per year in the next year. Assume the current quoted risk-free rate of interest, as measured by the nominal rate on U.S. Treasury 10-year notes, is 5. 25% per year. Further, assume that the news of an increase in inflation has not been factored into the risk-free rate. Given this information, what is the expected effect in the nominal risk-free rate? Assume that the inflation-free rate of interest and the inflation premium are not significantly large.

  A. Risk-free rate will decrease by 125 basis points
  B. The answer cannot be calculated from the information provided.
  C. Risk-free rate will increase by 42 basis points
  D. None of these answers is correct.
  E. Risk-free rate will increase by 417 basis points
  F. Risk-free rate will increase by 125 basis points
  F. Risk-free rate will increase by 125 basis points

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  Explanation

  Remember that the nominal risk-free rate of interest is comprised of two components, the real "inflation-free" rate of interest, and an inflation premium. The inflation premium is equal to the anticipated inflation rate.

  The equation for the calculation of the nominal interest rate in situations where the real inflation-free rate of interest and/or the inflation premium are low is as follows:

  Risk-free rate of return = k* + IP

  where: k* = the real inflation-free rate of return and IP = the inflation premium

  In this example, the anticipated inflation rate, IP, has increased by 125 basis points. The effect of this increase will be mirrored by an equal increase in the real-risk free rate of interest.

  When either the real "inflation-free" interest rate or the expected inflation rate are significantly large, the calculation of the nominal risk-free rate differs from the equation used when these factors are significantly small. Specifically, the

  calculation of the nominal risk-free rate of interest when theinflation-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