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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3381:

  When the relative strength ratio, the stock's price divided by the index's prices, is increasing this means the stock is:

  A. doing worse than the index.
  B. doing the same as the index.
  C. doing better than the index.
  D. tracking the index.
  C. doing better than the index.

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  Explanation

• Question 3382:

  Which of the following methods involves calculating an average beta for firms in a similar business and then applying that beta to determine the beta of its own project?

  A. Risk premium method.
  B. CAPM method.
  C. Accounting beta method.
  D. Pure play method.
  E. All of these answers are correct.
  D. Pure play method.

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  Explanation

  The pure play method is used for estimating the beta of a project in which a firm identifies several companies whose only business is the product in question, then calculates the beta for each firm, and finally, averages the betas to find an approximation to its own project's beta.

• Question 3383:

  What does a coefficient of correlation of 0.70 mean?

  A. Coefficient of determination is 0.49
  B. Almost no correlation because 0.70 is close to 1.0
  C. 70% of the variation in one variable is explained by the other
  D. Coefficient of nondetermination is 0.30
  E. None of these answers
  A. Coefficient of determination is 0.49

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  Explanation

  The coefficient of correlation, r, is just the square root of the coefficient of determination r-squared.

• Question 3384:

  By blindly adopting the ideas and works of others without acknowledgment, you have definitely violated Standard ________. You also may have violated Standard ________ because you may be making recommendations without a reasonable basis.

  A. II (A); IV (A.1)
  B. II (A); IV (B.1)
  C. II (A); IV (A.2)
  D. II (C); IV (B.2)
  E. II (C); IV (A.2)
  F. II (C); IV (B.1)
  G. II (C); IV (A.1)
  H. II (A); IV (B.2)
  G. II (C); IV (A.1)

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  Explanation

  This is explicitly stated under Standard II (C) - Prohibition against Plagiarism.

• Question 3385:

  In 1994, Butler Inc. issued $10 par value common stock for $25 per share. No other common stock transactions occurred until March 31, 1996, when Butler acquired some of the issued shares for $20 per share and retired them. Which of the following statements correctly states an effect of this acquisition and retirement?

  A. Retained earnings is increased.
  B. Additional paid-in capital is decreased.
  C. Additional paid-in capital is increased.
  D. 1996 net income is increased.
  E. 1996 net income is decreased.
  B. Additional paid-in capital is decreased.

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  Explanation

  When common shares are reacquired and retired, common stock par value is decreased by $10 per share and additional paid-in capital is decreased by $15 per share, cash is decreased by $20 per share, and $5 per share increases additional paid-in capital. Accounting rules do not allow a firm to record a gain or loss when it buys back treasury stock because the transaction is viewed as an equity transaction. Therefore, the effect is to decrease additional paid-in capital.

• Question 3386:

  The primary current source of generally accepted accounting principles rests with the ________.

  A. Securities and Exchange Commission
  B. Institute of Management Accountants
  C. American Institute of Certified Public Accountants
  D. New York Stock Exchange
  E. Financial Accounting Standards Board
  E. Financial Accounting Standards Board

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  Explanation

  FASB was created as an autonomous body with the responsibility of establishing financial accounting standards. It is responsible to hear all viewpoints from the entire economic community and be unbiased.

• Question 3387:

  Under an inflationary environment with stable inventories, a firm may change to FIFO from LIFO due to which of the following reason(s)?

  I. To allow earnings manipulation.

  II. To improve the reported working capital.

  III. To reduce tax drain on cash.

  IV.

  Show a more accurate representation of reported assets than LIFO.

  A. II and IV
  B. III only
  C. I and IV
  D. I and III
  A. II and IV

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  Explanation

  Under FIFO, inventory is overstated and hence, working capital is overstated under normal, inflationary conditions. At the same time, COGS is lower than under LIFO due to rising prices, increasing the taxable income and leading to higher taxes. However, firms cannot manipulate earnings under FIFO by changing purchasing patterns at the end of an accounting period, as it is able to do under LIFO, because FIFO prices are determined by the earliest goods purchased in the inventory.

• Question 3388:

  When purchased, plant assets are recorded at:

  A. cost
  B. market value
  C. future value
  D. lower of cost or market
  A. cost

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  Explanation

  Fixed assets are recorded at cost, which includes all normal and reasonable expenditures necessary to get the asset in place and ready to use.

• Question 3389:

  Helmut Humm, manager at a large U.S. firm, has just been assigned to the capital budgeting area to replace a person who left suddenly. One of Humm's first tasks is to calculate the company's weighted average cost of capital (WACC) ?and

  fast! The CEO is scheduled to present to the board in half an hour and needs the WACC ?now! Luckily, Humm finds clear notes on the Target capital component weights in the current workpapers. Unfortunately, all he can find for the cost of

  capital components is some handwritten notes. He can make out the numbers, but not the corresponding capital component. As time runs out, he has to guess.

  Here is what Humm deciphered:

  If Humm guesses correctly, the WACC is:

  A. 10.1%.
  B. 10.4%.
  C. 9.7%.
  D. 11.0%.
  B. 10.4%.

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  Explanation

  If Humm remembers to order the capital components from cheapest to most expensive, he can calculate WACC. The order from cheapest to most expensive is: debt, preferred stock (which acts like a hybrid of debt and equity), retained

  earnings, and common stock. (Remember that internal equity ?retained earnings is cheaper than external equity 璫ommon equity due to floatation costs.) Then, using the formula for WACC = (wd)(kd) + (wps)(kps) + (ws)(ks)+ (we)(ke)

  where wd, wps, wsandweare the weights used for debt, preferred stock, retained earnings, and common equity.

  WACC = (0.30 * 6. 0%) + (0.20 * 8.5%) + (0.15 * 11.00%) + (0.35 * 15. 0%) =10.4%.

• Question 3390:

  If a stock has an expected dividend payout ratio of 50%, a required rate of return of 13% and an expected dividend growth rate of 10%, what is the P/E ratio?

  A. 10
  B. 12. 5
  C. None of these answers
  D. 8.5
  C. None of these answers

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  Explanation

  The price/earnings ratio can be computed by dividing the expected dividend payout ratio (dividends divided by earnings) by the required rate of return (k) minus the expected growth rate of dividends (g). In this case, P/E = .50/(.13-.10) = 16. 7