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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3471:

  Which of the is/are false?

  I. A high p-value is necessary to reject a null hypothesis.

  II The higher the significance level, the greater is the chance that the null will be rejected when it is false.

  III.

  The higher the probability of Type II error, the higher is the chance of rejecting the null when it is false.

  A. II and III
  B. I, II and III
  C. I only
  D. II only
  E. III only
  F. I and II
  B. I, II and III

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  Explanation

  You can think of the p-value as the maximum probability that the null hypothesis is true despite observing the value of the test statistic that you have in the sample at hand. Thus, the lower the p- value, the greater is your confidence in rejecting the null hypothesis. The significance level represents an upper bound on the probability that the null hypothesis is true given the observed sample and the testing procedure. Hence, if you reject the null at the 5% significance level, for e.g., then the probability that the null is true despite your statistical evidence to the contrary could be as high as 5% (but no more, under the assumptions of the test). A Type II error refers to the event that we will fail to reject the null when it is false. The higher the probability of a Type II error, the lower the chance of rejecting the null when it is false.

• Question 3472:

  Given that the beginning value on a stock is $640, expected earnings are $80, the retention rate of earnings is 40%, and the required rate of return is 21%, what is the minimum expected ending value of the stock that makes it a profitable investment?

  A. $725. 40
  B. $742. 40
  C. Not enough information
  D. $726. 40
  E. $758.40
  D. $726. 40

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  Explanation

  The dividend payout ratio is equal to one minus the retention rate (1 - 0.4 = 0.6). Expected dividends are equal to the dividend payout ratio multiplied by expected earnings (0.6 x 80 = $48). In order for a stock to be a good investment, its rate of return should be equal or greater than the required rate of return.The minimum ending value that would make the stock investment in this question profitable is given by the equation (P2 + D) / P1 = 1 + k, where P2 is the ending value, P1 is the beginning value, D is the expected dividend, and k is the required rate return. Rearranging this yield P2 = ((k + 1) x P1) - D. In this question, the minimum ending value is (1.21 x 640) - 48 = $726. 40.

• Question 3473:

  Production of passenger cars in Japan increased from 3. 94 million in 1986 to 6. 74 million in 1994. What is the geometric mean annual percent increase?

  A. 16. 6
  B. 1.9
  C. 4. 0
  D. 47. 3
  E. 6. 9
  E. 6. 9

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  Explanation

  There are 9 years involved. The geometric mean = [(1 + 6. 74/3. 94)^1/8] - 1. In words, it is the 8th square root of (1 + 6. 74/3. 94) minus 1. So we have GM = (1 + 1.7107)^(1/8) - 1 = 0.069 = 6. 9%

• Question 3474:

  A perpetuity of $5,000 a year is priced at $40,000. The annual discount rate is:

  A. 12. 5%
  B. 13. 1%
  C. 11.8%
  D. 12. 75%
  A. 12. 5%

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  Explanation

  If r is the discount rate, then 40,000 = 5,000/r, giving r = 12. 5%

• Question 3475:

  If you deposit $250 a year, beginning next year, for 30 years into an account paying 6% per year, compounded annually, how much is in your account after that last deposit?

  A. $21,149.52
  B. $12,334. 91
  C. $19,764. 55
  D. $18,304. 12
  E. $3,441.21
  C. $19,764. 55

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  Explanation

  On the BAII Plus, press 30 N, 6 I/Y, 0 PV, 250 PMT, CPT FV. On the HP12C, press 30 n, 6 i, 0 PV, 250 PMT, FV. Note that the answer is displayed as a negative number. Make sure the BAII Plus has the P/Y value set to 1.

• Question 3476:

  According to the Keynesian model, if the marginal propensity to consume were 0.80, an independent increase in investment expenditures of $20 billion would cause the equilibrium aggregate nominal income to rise

  A. $80 billion.
  B. $16 billion.
  C. $100 billion.
  D. $20 billion.
  E. $50 billion.
  C. $100 billion.

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  Explanation

  The expenditure multiplier is found by M = 1/(1-MPC). Thus, here M = 1/(1-.8) = 5. Therefore the $20 billion increase in aggregate expenditures is magnified five times to $100 billion.

• Question 3477:

  Which of the following statements reflects the basic purposes of financial reporting?

  A. The best indication of a firm's ability to generate favorable cash flow is information based on previous cash receipts and payments.
  B. Financial accounting is expressly designed to measure directly the value of a business enterprise.
  C. None of these answers.
  D. The primary focus of financial reporting is information about an enterprise's resources.
  E. Investments and credit decisions often are based, at least in part, on evaluations of the past performance of an enterprise.
  E. Investments and credit decisions often are based, at least in part, on evaluations of the past performance of an enterprise.

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  Explanation

  Although investment and credit decisions reflect investors' and creditors' expectations about future enterprise performance, those expectations are commonly based, at least in part, on evaluations of past enterprise performance.

• Question 3478:

  Suppose we set the criterion for the rejection of the null that is extremely stringent, assuring us that the null will be definitely rejected. Then, which of the following is/are true?

  I. The probability of a Type I error is zero.

  II. The probability of Type II error is zero.

  III.

  The significance level of the test is 1. A.

  II only

  B.

  none of these answers

  C.

  I only

  D.

  II and III

  E.

  I and III

  Correct Answer. D
  D

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  Explanation

  A Type I error refers to the event that we will reject the null when, in fact, it is true. If the criterion is so stringent that you always reject the null, then the probability of type I error is one. A Type II error refers to the event that we will fail to reject the null when, in fact, it is false. If you always reject the null, then the probability of type II error is clearly zero. Also remember that the significance level is the same as the probability of making a Type I error. Hence, in this case, the significance level equals 100%.

• Question 3479:

  What is the Net Present Value of this series of annual cash flows using an interest rate of 15% per year: Year 0: <$10,000>, Year 1: $5,000, Year 2: $5,000, Year 3: $7,500? (Note that the <> are used to indicate a negative number).

  A. $2,981.21
  B. $5,077. 49
  C. $3,059.92
  D. $3,224. 98
  E. $3,104. 37
  C. $3,059.92

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  Explanation

  On the BAII Plus, press CF 2nd CLRWork 10000 +/- ENTER DownArrow 5000 ENTER DownArrow DownArrow 5000 ENTER DownArrow DownArrow 7500 ENTER DownArrow DownArrow 2nd Quit. Then press NPV 15 ENTER DownArrow CPT. On the HP12C, press these keys: 10000 CHS BlueShift CFo 5000 BlueShift CFj 5000 BlueShift CFj 7500 BlueShift CFj Then press 15 i, YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard.

• Question 3480:

  The deferred income tax account

  A. none of these answers
  B. is always reported as a long-term liability since the tax is not due until the next fiscal year
  C. is reported as an other asset even though it has a credit balance
  D. is where the difference between income tax expense and income tax payable is reconciled
  D. is where the difference between income tax expense and income tax payable is reconciled

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  Explanation

  The difference between income tax expense (based on accounting income) and the actual income taxes payable (based on taxable income) is reconciled in an account called deferred income taxes.