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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3291:

  Standard III (C) deals with ________.

  A. None of these answers
  B. Plagiarism
  C. Obligation to Inform Employer of Code and Standards
  D. Use of Professional Designation
  E. Disclosure of Conflicts to Employer
  F. Fundamental Responsibilities
  G. Duty to Employer
  H. Professional Misconduct
  E. Disclosure of Conflicts to Employer

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  Explanation

  Standard I deals with Fundamental Responsibilities. Standard II (A) deals with Use of Professional Designation. Standard II (B) deals with Professional Misconduct. Standard II (C) deals with Plagiarism. Standard III (A) deals with the Obligation to Inform Employer of Codes and Standards. Standard III (B) deals with the Duty to Employer. Standard III (C) deals with Disclosure of Conflicts to Employer.

• Question 3292:

  If the spread between the required rate of return and the anticipated dividend growth rate were to decrease significantly and suddenly while the remaining components of the P/E ratio were to remain unchanged, which of the following would likely occur? Further, a decrease in the retention rate would lead to what effect on the earnings multiplier, holding both k and g constant?

  A. The earnings multiplier would increase; the earnings multiplier would increase.
  B. The earnings multiplier would decrease; the earnings multiplier would decrease.
  C. The earnings multiplier would increase; the earnings multiplier would either increase or decrease depending on the firm's ROE compared to its cost of capital.
  D. The earnings multiplier would increase; the earnings multiplier would decrease.
  E. The earnings multiplier would decrease; the earnings multiplier would increase.
  A. The earnings multiplier would increase; the earnings multiplier would increase.

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  Explanation

  Remember that the equation used to determine the appropriate earnings multiplier for a stock market series is the following:

  {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, k = the required rate of return, and g = the anticipated growth rate of dividends.

  As the spread between k and g narrows, the earnings multiplier figure will increase. Indeed, the earnings multiplier is very sensitive to changes in the spread between k and g, and this is the primary reason for the greater relative volatility of

  the P/E ratio versus the EPS figure for a stock market series.

  A decrease in the retention rate will lead to an increase in the earnings multiplier figure, holding everything else equal. Remember that the retention rate is simply (1 - dividend payout ratio). So, a decline in the retention rate is analogous to an

  increase in the dividend payout ratio. An increase in the dividend payout ratio, holding everything else equal, will lead to an increase in the earnings multiplier figure.

• Question 3293:

  An investor purchases 1,000 shares of Clay Industries common stock for $40.00 per share at t0. At t1, this investor receives a $0.78 per share dividend on the 1,000 shares and purchases an additional 400 shares for $49.75 per share. At t2, he receives another $0.78 per share dividend on 1,400 shares and purchases 400 more shares for $55. 90 per share. At t3, sells 1,000 of the shares for $59.50 per share and the remaining 800 shares at $60.25 per share. Assuming no commissions or taxes, what is the dollar-weighted rate of return received on this investment?

  A. 18.22%
  B. None of these answers is correct.
  C. 15. 42%
  D. The answer cannot be calculated from the information provided.
  E. 15. 07%
  F. 17. 70%
  B. None of these answers is correct.

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  Explanation

  Remember that the dollar-weighted rate of return uses the IRR equation in the determination of its answer. Further, the dollar-weighted rate of return is another name for the IRR equation, and this name is commonly used within the field of investment management. In the determination of the dollar-weighted rate of return calculation, the first step should be to identify the cash flows for each period. This process is illustrated as follows:

  t0: {-[1,000 shares purchased * $40 per share] = [$40,000.00]

  t1: {-[ 400 shares purchased * $49.75 per share] + [$0.78 per share dividend * 1,000 shares] = [$19,120]

  t2: {-[400 shares purchased * $55. 90 per share] + [$0.78 per share dividend * 1,400 shares]} = [$21,268]

  t3: {[1000 shares sold * $59.50 per share] + [800 shares sold * $60.25 per share] = $107,700.00

  Now that the cash flows have been determined, incorporating this information into your calculator's cash flow worksheet and solving for IRR will yield a dollar-weighted rate of return of 13. 70% for this investment, which is none of the answers provided.

• Question 3294:

  Which of the following statements is most correct?

  A. The factors which affect a firm's business risk are determined partly by industry characteristics and partly by economic conditions. Unfortunately, these and other factors, which affect a firm's business risk, are not subject to any degree of managerial control.
  B. The firm's financial risk may have both market risk and diversifiable risk components.
  C. One of the benefits to a firm of being at or near its target capital structure are that financial flexibility becomes much less important.
  D. A firm's business risk is solely determined by the financial characteristics of its industry.
  E. All of these statements are false.
  B. The firm's financial risk may have both market risk and diversifiable risk components.

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  Explanation

  Financial risk is an increase in stockholders' risk, over and above the firm's basic business risk, resulting from the use of financial leverage, which refers to the use of fixed-income securities.

• Question 3295:

  What is the Net Present Value of this series of annual cash flows at an interest rate of 10% per year: Year 0: <$25,000>, Year 1: $2,000, Year 2: $0, Year 3: $15,000, Year 4 $0, Year 5 $18,000? (Note that the <> are used to indicate a negative number).

  B. $314. 37
  D. $42. 21
  A

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  Explanation

  On the BAII Plus, press CF 2nd CLRWork 25000 +/- ENTER DownArrow 2000 ENTER DownArrow DownArrow 0 ENTER DownArrow DownArrow 15000 ENTER DownArrow DownArrow 0 ENTERDownArrow DownArrow 18000 ENTER DownArrow DownArrow 2nd Quit. Then press NPV 10 ENTER DownArrow CPT. On the HP12C, press these keys: 25000 CHS BlueShift CFo 2000 BlueShift CFj 0 BlueShift CFj 15000 BlueShift CFj 0 BlueShift CFj 18000 BlueShift CFj. Then press 10 i, YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure the BAII Plus has the P/Y value set to 1.

• Question 3296:

  Brad Rich uses an investment strategy that assumes stock prices will not reflect quarterly earnings surprises as quickly as suggested by the efficient market hypothesis. Rich believes stocks will earn positive abnormal rates of return over the six months following an earnings surprise. Which form of the efficient market hypothesis would this violate?

  A. None.
  B. Weak form only.
  C. Semistrong and weak forms only.
  C. Semistrong and weak forms only.

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  Explanation

• Question 3297:

  For the past 30 years or so, the retention rate of earnings for firms in the SandP 400 has fluctuated largely between

  A. 45 and 60%.
  B. 20 and 30%.
  C. 10 and 20%.
  D. 75 and 90%.
  A. 45 and 60%.

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  Explanation

  Between 1977 and 1994, the retention rate has fluctuated largely between 45 and 60%, although there was a period in the early 1990s when it fell to a low of 25%. The retention rate is used to derive the growth rate of earnings and dividends, which is used to derive the earnings multiplier.

• Question 3298:

  In a period of rising prices, the inventory method that gives the highest possible value for ending inventory is:

  A. weighted average
  B. FIFO
  C. LIFO
  D. gross profit
  B. FIFO

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  Explanation

  The ending inventory under FIFO is priced at the most recent, and thus the highest prices (in a period of rising prices) than any of the other methods.

• Question 3299:

  Consider the following information:

  30-day treasury rate (Risk Free rate) 5. 2%

  Company XYZ Bond yield 12. 2%

  Beta 1.2

  Risk Premium 4. 5%

  Credit Rating BBB

  Calculate Company XYZ's cost of retained earnings using the Bond-Yield-plus-Risk-Premium approach.

  A. 21.9%
  B. 16. 7%
  C. 12. 2%
  D. 5. 2%
  E. 20.4%
  F. 9.7%
  B. 16. 7%

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  Explanation

  To estimate a firm's cost of retained earnings using the Bond-Yield-plus-Risk-Premium approach, simply take the company's bond yield and add the risk premium. In this case the cost of retained earnings = 12. 2% + 4. 5% = 16. 7%.

• Question 3300:

  What deposit today is needed to have $4,000 in 4 years, assuming the money will earn interest at 5% per year, compounded monthly?

  A. $3,290.81
  B. $3,276. 28
  C. $4,000.00
  D. $384. 57
  E. $3,934. 02
  B. $3,276. 28

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  Explanation

  On the BAII Plus, press 48 N, 5 divide 12 = I/Y, 0 PMT, 4000 FV, CPT PV. On the HP12C, press 48 n, 5 ENTER 12 divide i, 0 PMT, 4000 FV, PV. Make sure the BAII Plus has the P/Y value set to 1.