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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3401:

  In Keynesian view, the best macroeconomic policy is to:

  A. increase government investment expenditures during economic booms to offset effects of reduced capacity during the recession to follow.
  B. regulate aggregate expenditures to match output capacity.
  C. regulate wages to control inflation and promote full employment.
  D. control government expenditures to control inflation.
  B. regulate aggregate expenditures to match output capacity.

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  Explanation

  In Keynesian economics, fluctuations in aggregate demand are a major source of movements in the economy. Equilibrium occurs at any output level which equals the spending level. To maintain an equilibrium at the maximum sustainable real GDP, Keynesians prescribe regulating the planned aggregate expenditures to equal the potential real GDP.

• Question 3402:

  Intelligent Semiconductor is considering issuing additional common stock. The firm has an after-tax cost of debt of 8.55%, with the yield to maturity on the firm's outstanding senior long-term debt at 13%. The company's combined federal/state income tax is 35%. The risk-free rate of return is 5. 6%, and the annual return on the broadest market index is expected to be 13. 5%. Shares of Intelligent Semiconductor have a historical beta of 1.6, and in the past, the firm has assumed a 265 basis point risk premium when calculating the cost of equity. The firm's next dividend is expected to be $0.50 per share, and the dividend has been growing at a 12% annual rate. Finally, the firm's common stock is priced at $24. 78. What is the cost of equity for this firm using the Dividend-Yield-plus-Growth-Rate, or Discounted Cash Flow (DCF) approach?

  A. 18.24%
  B. The cost of equity using the DCF approach cannot be calculated from the information provided.
  C. 16. 15%
  D. 14. 02%
  E. 15. 65%
  F. 11.20%
  D. 14. 02%

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  Explanation

  The cost of issuing common stock can be calculated using several methods, including the Bond-Yield- Plus-Risk-Premium approach, Discounted Cash Flow method, or by using the Capital Asset Pricing Model. In this example, you have been asked to calculate the cost of equity using the Discounted Cash Flow method, which is commonly referred to as the Dividend-Yield-plus-Growth-Rate approach. In calculating the cost of equity using this approach, the following components are necessary: next expected annual dividend, growth rate of dividends, and the current stock price. Everything else provided in this example is largely irrelevant. The calculation of the cost of equity using the DCF approach is as follows: {[next annual dividend $0.50 / common stock $24. 78] + expected dividend growth rate 12%} = 14. 018%.

• Question 3403:

  Holding everything else equal, which of the following firms would likely have a high payout ratio? Further, as time progresses (in the long run), would the retention ratio of similar firms be expected to increase or decrease?

  A. Pharmaceutical firm; decrease
  B. Specialty retailer; increase
  C. Automobile manufacturer; increase
  D. Pharmaceutical firm; increase
  E. Automobile manufacturer; decrease
  F. Specialty retailer; decrease
  E. Automobile manufacturer; decrease

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  Explanation

  Remember that a positive relationship exists between the maturity of an industry and the payout ratio of firms within that industry. The automobile industry is a mature industry, more so than most other industries including pharmaceuticals or specialty retailers. As an industry advances in maturity, growth of the overall industry will decline. As growth opportunities diminish, companies within the industry will be forced to pay out a larger proportion of their earnings as dividends; i.e. the dividend payout ratio of firms within the industry will increase. Remember that the retention ratio is equal to (1 - the dividend payout ratio). Thus, the retention ratio of companies will likely decline as the industry advances inmaturity. The relationship between the dividend payout ratio and the maturity of the industry is negative and loosely linear.

  As an industry becomes more mature, growth opportunities decline. This relationship is also loosely linear.

• Question 3404:

  When complying with Standard IV (B.3) - Fair Dealing, a change of recommendation from "sell" to "buy" is considered:

  A. none of these answers.
  B. material only if so specified prior to the recommendation by the client.
  C. not material.
  D. material only if so specified prior to the recommendation by the investment manager.
  E. generally material.
  E. generally material.

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  Explanation

  In general, a material change in a firm's recommendation is one that could be expected to affect the investor's judgment or motivate an informed buyer or seller to take an investment action. Hence, a change of recommendation from "sell" to "buy" is generally material.

• Question 3405:

  Charlotte Villa, CFA, is a portfolio manager analyzing two securities. The 10-year bonds of Zehmer Corp. are callable beginning in two years. The 10-year bonds of Cavalier Inc. are not callable, but have a floating coupon that adjusts annually based on a margin above comparable maturity U.S. Treasury issues with no limits on the rate adjustment. Both bond issues are rated AA. Villa uses a computer model to value individual bonds based on their zero-volatility spread and/or option-adjusted spread (OAS). She decided to increase the interest rate volatility assumption in her model without changing any of the other model inputs. Identify how this change in assumption will affect the OAS for each bond.

  A. The OAS for both bonds will increase.
  B. The OAS for both bonds will decrease.
  C. The OAS for the Zehmer bond will decrease, but the OAS for the Cavalier bond will be unchanged.
  C. The OAS for the Zehmer bond will decrease, but the OAS for the Cavalier bond will be unchanged.

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  Explanation

• Question 3406:

  Standard ________ states that the financial analyst must use particular care to maintain independence and objectivity in relationships with issuers of securities.

  A. I (B.2)
  B. III (B.1)
  C. IV (A.3)
  D. II (C.4)
  E. None of these answers
  C. IV (A.3)

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  Explanation

  Standard IV (A.3) - Independence and Objectivity - ensures that clients have the benefit of work and opinions unaffected by any potential conflict of interest that may adversely affect their judgment. Members should maintain their independence by being wary of "perks" offered by external sources such as corporations, issuers, underwriters and brokers.

• Question 3407:

  The formula for calculating profit margin is

  A. total sales divided by total expenses
  B. net sales minus total expenses divided by net income
  C. net income divided by net sales
  D. none of these answers is correct
  C. net income divided by net sales

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  Explanation

  Profit margin, also called return on net sales, is calculated by dividing net income by net sales. This ratio measures the average portion of each dollar of revenue that ends up as profit.

• Question 3408:

  As a general rule, revenue is normally recognized when it is ________.

  A. realizable
  B. measurable and received
  C. measurable and earned
  D. realizable and earned
  D. realizable and earned

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  Explanation

  Revenue is generally recognized when it is realizable and earned.

• Question 3409:

  Which of the following events would a technical analyst interpret as bearish?

  A. a low rate of odd-lot short sales as a percentage of total odd-lot sales
  B. decline in credit balances
  C. all of these answers
  D. a low mutual fund cash position
  B. decline in credit balances

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  Explanation

  Credit balances result when investors sell stocks and leave the proceeds with their brokers, expecting to reinvest them shortly. Technicians view a decline of credit balances as a decrease in buying power and a bearish sign.

• Question 3410:

  Stock dividends

  A. must be accompanied by cash dividends.
  B. are similar to stock splits in that they do not change the fundamental position of current shareholders.
  C. have the same effects on financial statements as cash dividends.
  D. are viewed unfavorably by investors and thus should not be used.
  E. have no effect on a firm's balance sheet.
  B. are similar to stock splits in that they do not change the fundamental position of current shareholders.

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  Explanation

  Stock dividends are dividends paid in the form of additional shares of stock rather than in cash. The total number of shares is increased, so earnings, dividends, and price per share all decline. Stock dividends that are used on a regular basis will keep the stock price more or less constrained, that is, within a desired trading range.