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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3431:

  Silverio Arvantis is an aggressive and quick-silver analyst with Foresi Associates, an investment advisory firm. Silverio, a freshly minted Ph.D. from the University of Chicago, recently formulated an algorithm for selecting the portfolio weights in relatively new high-tech stocks. The algorithm evaluates 43 different variables to choose the investments and as such, is fairly complex in nature. Not wishing to drown his clients in esoteric terms like "martingale" and "stochastic transformation," Silverio writes up a short report which touches only briefly on the major characteristics of the model. Instead, he focuses on the performance of the model on past market data, which is absolutely sterling. Based on these tests, Silverio recommends 4 stocks for immediate purchase. Silverio has:

  A. violated Standard V (B) - Performance Presentation by relying on past data.
  B. not violated any standards.
  C. violated Standard IV (A.2) - Research Reports by failing to disclose sufficient details about the algorithm.
  D. violated Standard IV (A.2) - Research Reports by failing to distinguish opinion from fact.
  C. violated Standard IV (A.2) - Research Reports by failing to disclose sufficient details about the algorithm.

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  Explanation

  Standard IV (A.2) requires the member to disclose details of the reasoning and logic behind the recommendations so that investors can follow and challenge it and analyze the risks inherent in the recommended strategy. While Silverio does not have to delve into excessive technical details or reveal any proprietary formulas, the report must contain explanations for the recommendations. By omitting these, he has violated Standard IV (A.2). Note, however, that there is no evidence that he has confused opinion with fact.

• Question 3432:

  Which of the following figures is not explicitly incorporated into the earnings per share (EPS) calculation?

  A. Interest Expense
  B. Sales
  C. Fixed Costs
  D. Tax Rate
  E. Weighted Average Cost of Capital
  F. Variable Costs
  E. Weighted Average Cost of Capital

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  Explanation

  The WACC is not incorporated into the EPS calculation. The EPS calculation is found by the following equation:

  {EPS = [(Sales - Fixed Costs - Variable Costs - Interest Expense)(1 - Tax Rate)] / [# of Common Shares Outstanding]}

  Additionally, the EPS figure can be found by:

  {EPS = [(EBIT - Interest Expense)(1 - Tax Rate) / # of Common Shares Outstanding]}.

• Question 3433:

  Which of the following choices correctly describes a project which will direct the operations of a company into a new market or functional niche, is primarily enacted to expand revenues, and one in which the firm does not have an existing proxy?

  A. Marginal project
  B. Extraordinary item
  C. Retrenchment project
  D. Replacement project
  E. Expansion project
  E. Expansion project

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  Explanation

  In an analysis of an expansion project, the relevant cash flows are those which apply wholly to the proposed project. There is no existing project whose cash flows must be incorporated into the analysis, as in the examination of a replacement project. "Marginal project" and "retrenchment project," are fictitious terms, and "extraordinary item" is an accounting classification referring to an event that is both unusual and nonrecurring.

• Question 3434:

  High payout ratios are closely correlated with which of the following attributes?

  A. The level of regulation in an industry.
  B. The growth rate of earnings.
  C. The level of competition in the industry.
  D. More than one of these answers is correct.
  E. All of these answers are correct.
  F. Maturity of the industry.
  D. More than one of these answers is correct.

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  Explanation

  All but one of these answers is correct. Specifically, the dividend payout ratio is very closely related to the maturity of the industry, the level of competition in the industry, and the growth rate in earnings. Remember that all of these factors are interrelated. As an industry becomes more mature, competition becomes maximized, margins shrink, and the growth potential of the industry declines. This will lead to a decrease in positive NPV investment opportunities in the industry, forcing firms to increase the proportion of earnings paid out to shareholders in the form of dividends.

  The level of regulation in an industry is not necessarily highly correlated with the dividend payout ratio of firms within the industry. For example, the financial services industry is very heavily regulated, yet firms within this sector do not pay a disproportionate amount of their earnings as dividends. However, he utility industry, also heavily regulated, pays a very high proportion of earnings as dividends.

• Question 3435:

  Which of the following is not classified as an income property? A leased:

  A. office building.
  B. none of these answers.
  C. condominium.
  D. shopping center.
  E. apartment complex.
  B. none of these answers.

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  Explanation

  All of the answers are income properties.

• Question 3436:

  Standard III (B) is known as ________.

  A. Interactions with Clients and Prospects
  B. Preservation of Confidentiality
  C. None of these answers
  D. Fair Dealing
  E. Investment Process
  F. Duty to Employer
  G. Prohibition against Use of Material Nonpublic Information
  H. Professional Misconduct
  F. Duty to Employer

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  Explanation

  Standard IV (A) deals with the Investment Process. Standard III (B) deals with Duty to Employer. Standard IV (B.3) deals with Fair Dealing. Standard IV (B) deals with Interactions with Clients and Prospects. Standard V (A) deals with Prohibition against Use of Material Nonpublic Information. Standard IV (B.5) deals with Preservation of Confidentiality. Standard II (B) deals with Professional Misconduct.

• Question 3437:

  Which of the following is NOT an objective of the conceptual framework devised by FASB?

  A. Establish a logical and coherent system of accounting thought.
  B. Establish objectives of financial reporting by businesses.
  C. Identify the characteristics of accounting information that make its disclosure useful.
  D. Enforce a single standard of accounting disclosures across the various industries.
  D. Enforce a single standard of accounting disclosures across the various industries.

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  Explanation

  The conceptual framework devised by FASB is not concerned with enforcing any rigid standards of accounting disclosures. Rather, it is a system of laying out the goals and objectives of accounting disclosure and formulating standards which could best serve the needs of the industry. In such a framework, a fair amount of flexibility is built-in so that the differing characteristics of various industries can be accommodated. The various SFACs which comprise the conceptual framework are the foundation on which the detailed principles and pronouncements of the FASB are based.

• Question 3438:

  An analyst with Smith, Kleen and Beetchnutty Securities is trying to determine the EPS for a stock market series. Which of the following steps will not be involved in his EPS estimation?

  A. Estimate next year's corporate tax rate for the series.
  B. Estimate next year's interest-expense-per-share for the series.
  C. Estimate the sales-per-share for the series.
  D. Estimate the operating profit margin for the series.
  E. All of these steps are required.
  F. Estimate next year's depreciation-per-share for the series.
  E. All of these steps are required.

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  Explanation

  All of these answers are required steps in the estimation of the EPS figure for a stock market series.

  When an analyst is trying to determine the EPS for a stock market series, the following steps represent the preferred method:

  Step 1: Estimate sales-per-share for the series Step 2: Estimate the operating profit margin for the series Step 3: Estimate the depreciation-per-share for the series for the next year Step 4: Estimate the interest-expense-per-share for the next year Step 5: Estimate the corporate tax rate for the next year

  These steps will lead to an EPS figure, which can be multiplied by the appropriate earnings multiplier (i.e. the price-to-earnings ratio) to determine the ending price for the stock market series.

• Question 3439:

  If a frequency distribution has open-ended intervals at the extremes, which measure of central tendency is the most difficult to estimate?

  A. Mean
  B. None of these answers
  C. Median
  D. All of these answers
  E. Mode
  A. Mean

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  Explanation

  This is so since in a frequency distribution we do not necessarily know what the extreme values are especially in an open ended class. Therefore, the mean, which is very sensitive to extreme values will be difficult to determine.

• Question 3440:

  Recent ________ is the biggest external factor that affects the growth rate of the depreciation expense series.

  A. interest
  B. change in current levels
  C. taxes
  D. capital expenditures
  D. capital expenditures

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  Explanation

  One way to understand this is: depreciation is most acute with new assets; if one has recently invested in new assets (i.e. capital expenditures), one would expect depreciation expense to increase. But know well that capital expenditure may not be only new asset purchase.