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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3421:

  Which of the following relating to procedures for complying with Standard III (E) is false? The compliance procedures should:

  A. outline permissible conduct.
  B. delineate procedures for reporting violations and sanctions.
  C. be easy to understand.
  D. outline the scope of the procedures.
  E. designate a compliance officer.
  F. none of these answers.
  F. none of these answers.

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  Explanation

  All the statements are true. Adequate compliance procedures should be drafted so that they are easy to understand. They should designate a compliance officer and clearly define the officer's authority and responsibility; outline the scope of the procedures; outline permissible conduct and delineate procedures for reporting violations and sanctions.

• Question 3422:

  Van Jeffery, CFA, utilizes price multiples to evaluate the attractiveness of potential investment opportunities. However, Jeffery's supervisor does not support using price multiples exclusively in making investment decisions. The supervisor

  points out the following:

  Statement 1:P/S ratios are not able to capture the different cost structures of companies-Statement 2: The P/CF ratio is more stable than the P/E ratio.

  Statement 3:An advantage of the P/B ratio (unlike the P/E ratio) is that the P/B ratio cannot be negative.

  Which of the supervisor's three statements is least likely to be correct?

  A. Statement 1
  B. Statement 2
  C. Statement 3
  C. Statement 3

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  Explanation

• Question 3423:

  Given the following assumptions about a companyfinancial estimates, calculate the P/E ratio, and determine whether the stock is undervalued or overvalued. Which of the following statements is most correct? The P/E ratio is:

  A. 7. 41 and the stock is overpriced.
  B. 7. 41 and the stock is underpriced.
  C. 6. 78 and the stock is overpriced.
  D. 6. 78 and the stock is underpriced.
  A. 7. 41 and the stock is overpriced.

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  Explanation

  First, determine the value of the stock. Then, compare your calculation to the current market price. The assumptions lead us to use the P/E (earnings multiplier) and EPS to calculate the value.

  Step 1: Estimate the P/E ratio

  Step 2: Estimate Earnings Per Share (given at $2. 75)

  Step 3: Calculate value

  Step 4: Determine under/over valuation

  Since the market value is greater than the estimated value, the stock is overpriced.

• Question 3424:

  Which of the following would occur prior to the completion of a long-term contract when using the completed-contract method as opposed to the percentage-of-completion method?

  A. A firm's current period income tax liability would be lowered.
  B. A firm's current period profits would be greater.
  C. None of these answers.
  D. All of these answers.
  E. A firm's current period revenues would be greater.
  A. A firm's current period income tax liability would be lowered.

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  Explanation

  A firm's income tax liability is lower under the competed-contract method because revenues and related income taxes on profits are deferred until the contract is completed. The percentage-of- completion method would recognize revenues earlier and would generate higher current period income tax liabilities.

• Question 3425:

  The heights of the five members in a family have been measured and found to be (in centimeters):

  146, 162, 165, 187, 152

  The range and the mean deviation of the heights are:

  A. 41, 46. 9
  B. 41, 54. 4
  C. 41, 10.9
  D. 49, 61.8
  C. 41, 10.9

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  Explanation

  range = maximum value - minimum value = 187 - 146 = 41 centimeters. To calculate the mean deviation, you have to first calculate the mean. The mean equals (146 + 162 + 165 + 187 + 152)/5 = 162. 4. The total deviation is abs(146-162. 4) + abs(162-162. 4) + abs(165-162. 4) + abs(187-162. 4) + abs(152-162. 4) = 16. 4 + 0.4 + 2. 6 + 24. 6 + 10.4 = 54. 4. Therefore, MD = 54. 4/5 = 10.88.

• Question 3426:

  What is the best proxy for the risk-free rate?

  A. The rate on T-bills.
  B. The rate on 20-year Treasury bonds.
  C. The rate on 5-year Treasury notes.
  D. The rate on AAA corporate bonds.
  C. The rate on 5-year Treasury notes.

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  Explanation

  Treasury securities are essentially risk-free because of the seeming impossibility of a U.S. government default. In the recent past, the 5-year Treasury note rate has been used as a proxy for the risk-free rate because it is said to reflect the investment horizon of most investors.

• Question 3427:

  Weak form efficiency states that excess risk adjusted returns cannot be obtained by using:

  A. insider information
  B. technical analysis
  C. fundamental analysis
  D. portfolio theory
  B. technical analysis

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  Explanation

  Weak form - you can't make excess returns using technical analysis. Semi-Strong form - you can't make excess returns using fundamental analysis, which is the use of public information. Strong Form - you can't make excess returns using non-public information.

• Question 3428:

  The estimate of ________ combined with the firm's retention rate will indicate its growth potential.

  A. ROE
  B. assets
  C. ROA
  D. current ratio
  E. equity
  A. ROE

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  Explanation

  The estimate of ROE combined with the firm's retention rate will indicate its growth potential.

• Question 3429:

  Venture capital can create value to the firm by

  A. venture capitalists figuring out how to manage a firm in a poorly managed sector and then acquiring other firms in the same sector at low prices.
  B. providing current management with new and additional funding.
  C. paying a premium for the firm and then proceeding to sell the firm in "pieces."
  D. investing in additional company assets.
  A. venture capitalists figuring out how to manage a firm in a poorly managed sector and then acquiring other firms in the same sector at low prices.

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  Explanation

  The venture capitalist believes that the managements of these acquired firms can be improved by using the same techniques that were used for the first company. The values of the acquired firms will therefore increase because of the improvement in the management.

• Question 3430:

  A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below: Years01234 S-1,1009003505010 L-1,1000300500850 The company's cost of capital is 12 percent, and it can get an unlimited amount of capital at that cost. What is the regular IRR (not MIRR) of the better project?

  A. 12. 00%
  B. 13. 09%
  C. 17. 46%
  D. 12. 53%
  E. 13. 88%
  B. 13. 09%

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  Explanation

  Time line:

  0 k = 12%1234 Years

  Cash flows S -1,1009003505010

  NPV(S) = ? IRR(S) = ?

  Cash flows L -1,1000300500850

  NPV(L) = ? IRR(L) = ?

  Financial calculator solution:

  Calculate the NPV and IRR of each project then select the IRR of the higher NPV project Project S; Inputs: CF(0) = -1,100; CF(1) = 900; CF(2) = 350; CF(3) = 50; CF(4) = 10; I = 12 Output: NPV(S) = 24. 53; IRR(S) = 13. 88%.

  Project L; Inputs: CF(0) = -1,100; CF(1) = 0; CF(2) = 300; CF(3) = 500; CF(4) = 850; I = 12

  Output: NPVL = 35. 24; IRR(L) = 13. 09%.

  Project L has the higher NPV and its IRR = 13. 09%.