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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3391:

  Firm A has just paid a cash dividend of $6. 2 per share. If the growth rate is expected to be 6% and the price of the stock is $24. 90, the expected return on the stock is:

  A. 32. 39%
  B. 26. 39%
  C. 20.39%
  D. 24. 90%
  A. 32. 39%

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  Explanation

  Po = D1/(k-g). In this case, g = 6%, D1 = Do*(1+g) = 6. 2*1.06 = $6. 572 and Po = $24. 90. Therefore, k = 32. 39%. Note that Brigham and Houston refer to k as the cost of retained earnings; this is the same as the expected rate of return demanded by shareholders, which is the same as the rate of return on common equity.

• Question 3392:

  Contingent losses are recognized:

  I. when they actually occur during a contingency.

  II. only if it is probable that a loss will occur.

  III. only if the amount of the loss can be reasonably estimated.

  IV.

  at the management's discretion.

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

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  Explanation

  II and III must hold together for a recognition of contingent losses to take place. GAAP defines "probable" as "greater than 50% chance." Since this is subjective, the management has considerable discretion on the timing of recognition.

• Question 3393:

  What annual interest rate, compounded annually, would cause a series of 10 deposits of $1,000 to accumulate to $18,000, if the first deposit is made one year from today?

  A. 14. 49%
  B. 12. 52%
  C. 12. 69%
  D. 11.84%
  E. 35. 82%
  B. 12. 52%

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  Explanation

  On the BAII Plus, press 10 N, 0 PV, 1000 PMT, 18000 +/- FV, CPT I/Y. On the HP12C, press 10 n, 0 PV, 1000 PMT, 18000 CHS FV, i. Make sure that the BAII Plus has the P/Y value set to 1.

• Question 3394:

  An individual who is employed part time but who is looking for a full-time job is classified as

  A. frictionally unemployed.
  B. employed.
  C. structurally unemployed.
  D. cyclically unemployed.
  B. employed.

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  Explanation

  Since the individual is currently employed he or she is considered employed, technically. Such a person is underemployed but not technically unemployed.

• Question 3395:

  Rhonda McLeavon, a quantitative analyst with Churn Brothers Brokerage, has been instructed to perform a statistical analysis to test whether increases in marketing expenses amongst drug companies is positively related to institutional buying of these same companies' common stock. Rhonda begins her analysis and performs the following steps, in succession:

  Step 1: Formulating and stating the hypothesis Step 2: Identifying the appropriate test statistic and probability distribution Step 3: Specifying the significance level Step 4: Stating the decision rule

  Now that these first four steps have been completed, Ms. McLeavon should proceed with which of the following? Choose the best answer.

  A. None of these answers is correct
  B. Collecting the data and performing the calculations
  C. Determining the z-statistic
  D. Determining the p-value
  E. Performing and autocorrelation test to identify any heterskedasticity problems
  F. Evaluating the goodness of fit
  B. Collecting the data and performing the calculations

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  Explanation

  Hypothesis testing involves a series of seven explicit steps:

  Step 1: Formulating and stating the hypothesis Step 2: Identifying the appropriate test statistic and its probability distribution Step 3: Specifying the significance level Step 4: Stating the decision rule Step 5: Collecting the data and performing the necessary calculations Step 6: Making the statistical decision Step 7: Making the economic/investment decision.

• Question 3396:

  Market index funds

  A. attempt to diversify out of securities.
  B. have management costs similar to those of regular mutual funds.
  C. attempt to outperform the market.
  D. None of these answers.
  E. have very high correlations with market indexes.
  E. have very high correlations with market indexes.

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  Explanation

  Market index funds are closely matched in composition to specified market indexes such as the SandP 500. For this reason, a market index fund typically has correlation rates in excess of 0.99 with its chosen index. Because it only attempts to replicate the index, its management costs are very low.

• Question 3397:

  A large silver mining corporation in Australia is expecting to have three large inflows of raw silver resulting from a discovery of three silver seams that were previously undetectable. The firm expects the first silver inflow to be ready for sale in nine months, followed by the second inflow three months later and the final inflow six months later. The mining company is expecting the price of silver to begin a downward trend for the next 18 months and wants to hedge the expected inflows without exposing themselves to credit risks. The most appropriate instrument the company should use is a:

  A. series of futures contracts expiring in 9, 12, and 15 months.
  B. series of forward contracts expiring in 9, 12, and 15 months
  C. swap contract with payments in 9, 12, and 15 months
  A. series of futures contracts expiring in 9, 12, and 15 months.

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  Explanation

• Question 3398:

  When examining a capital project with non-normal cash flows from the perspective of IRR, some distinct problems can arise, which of the following choices best describes the problems that can occur when examining projects with non-normal cash flows using IRR?

  A. No IRR, an IRR which leads to an incorrect accept reject decision, concave MIRR profile
  B. Multiple IRRs, an IRR which leads to an incorrect accept/reject decision, convex MIRR profile
  C. Multiple IRRs, no IRR
  D. Multiple IRRs, no IRR, an IRR which leads to an incorrect accept/reject decision
  E. Timing differences, project scale differences, multiple IRRs
  D. Multiple IRRs, no IRR, an IRR which leads to an incorrect accept/reject decision

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  Explanation

  When examining capital projects with non-normal cash flows, three distinct problems can occur: the project can have multiple IRRs, no IRR, or the calculation can lead to the production of an IRR figure which leads to an incorrect accept/reject decision. Thus, the second choice represents the most correct answer. "Timing differences" and "project scale differences" are two reasons for a conflict in the NPV and IRR calculations, and "MIRR profile" is a fictitious term.

• Question 3399:

  Which of the following can be found in Standard IV?

  A. Members shall not participate in any professional conduct involving dishonesty, fraud, deceit, etc.
  B. Members shall exercise diligence and thoroughness in making investment recommendations or in taking investment actions.
  C. Members shall not knowingly participate or assist in any violation of laws, rules, or regulations.
  D. Members shall deliver a copy of the Code to their employer.
  E. Members shall not misrepresent investment performance.
  B. Members shall exercise diligence and thoroughness in making investment recommendations or in taking investment actions.

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  Explanation

  Standard IV states that members shall exercise diligence and thoroughness in making investment recommendations or in taking investment actions.

• Question 3400:

  In periods of rising prices, which inventory costing method results in the smallest income tax expense?

  A. Average cost
  B. Perpetual
  C. FIFO
  D. LIFO
  D. LIFO

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  Explanation

  LIFO assigns the largest dollar value amounts to COGS when purchase prices are rising, thus resulting in lower net income and lower income taxes.