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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3531:

  A firm's stock has a coefficient of variation of 0.85. It has a beta of 1.23 and a firm specific variance of 0.06. The market portfolio has an expected return of 14% and a standard deviation of 19%. The firm has a payout ratio of 0.3 and it obtains a return on equity equal to 10.3%. The firm's stock is trading at $25. 1 per share. The risk-free rate in the economy is 5. 4%. What's the dividend that the market expects the firm to pay out next year?

  A. $2. 20
  B. $2. 41
  C. $2. 05
  D. $1.99
  A. $2. 20

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  Explanation

  The Dividend Discount Model implies that the firm's share price is given by Po = D1/(k-g), using standard notation. The dividend growth rate is given by g = ROE*(1-dividend payout ratio) = 10.3% * 0.7 = 7. 21%. The CAPM expected rate of return on the stock is equal to the risk-free rate plus beta times the market premium. So the expected return on the stock is 5. 4% + 1.23*(14 - 5. 4)% = 15. 98%. Therefore, the firm is expected to pay out $25. 1*(15. 98% - 7. 21%) = $2. 2.

• Question 3532:

  Maria Golino is a financially savvy client of Hector Gomez, a portfolio manager with a small investment firm. Maria recently directed Hector to execute all trades on her behalf with Omega Brokerage. Omega charges higher commissions than most other brokerage firms but in this case, has agreed to provide research to Hector on behalf of Maria. Hector does not object to this and starts directing Maria's trades to Omega. Hector has

  A. violated Standard IV (B.1) - Fiduciary Duties.
  B. violated Standard IV (A.2) - Research Reports.
  C. violated Standard IV (B.8) - Disclosure of Referral Fees.
  D. not violated any standards.
  D. not violated any standards.

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  Explanation

  The practice in which a portfolio manager directs trades to a particular brokerage in exchange for additional goods or services at the behest of the client is known as "directed brokerage." This practice is not in violation of any AIMR standards since the portfolio manager is acting on the instructions of his client and the benefits accrue to the client. Standard IV (B.1) - Fiduciary Duties - and the Topical Study "Fiduciary Duty."

• Question 3533:

  The capital budgeting director of Sparrow Corporation is evaluating a project, which costs $200,000, is expected to last for 10 years and produce after-tax cash flows, including depreciation, of $44,503 per year. If the firm's cost of capital is 14 percent and its tax rate is 40 percent, what is the project's IRR?

  A. 18%
  B. 8%
  C. 12%
  D. -5%
  E. 14%
  A. 18%

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  Explanation

  $200,000 = $44,503(PVIFA(Irr,10)) PVIFA(Irr,10) = 4. 49408 ;IRR = 18%.

• Question 3534:

  Which of the following is not a common tool used in financial statement analysis?

  A. trend series analysis
  B. random walk analysis
  C. common size statement analysis
  D. ratio analysis
  B. random walk analysis

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  Explanation

• Question 3535:

  ________ states the range over which a population parameter likely lies.

  A. A point estimate
  B. A normal deviate
  C. A confidence interval
  D. A stratified range estimate
  C. A confidence interval

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  Explanation

  A confidence interval gives a range of values within which there is a high probability that the population parameter occurs.

• Question 3536:

  Given that the expected dividend payout ratio on a common stock is 0.55, the required rate of return is 17%, the dividend growth rate is 12%, and next year's earnings are $2. 52, using the earnings multiplier model, what is the estimated value of the stock?

  A. $23. 95
  B. $30.88
  C. Not enough information
  D. $25. 52
  E. $27. 72
  E. $27. 72

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  Explanation

  The earnings multiplier model postulates that P/E = (D1/E)/(k -g), where P/E is the price to earnings ratio, D1 is next year's expected dividends, E is next year's earnings, k is the required rate of return, and g is the growth rate in dividends. D1/ E is also known as the dividend payout ratio. In this question, the P/E is 0.55 / (0.17 - 0.12) = 11. We can multiply P/E by next year's earnings to arrive at our expected current stock value ((P/E) x E = P). In this question, the estimated value is 11 x 2. 52 = $27. 72.

• Question 3537:

  The Ace Company is considering investing in a piece of property, which costs $105,000. The property will return a constant cash flow forever. If the firm's cost of capital is 9 percent and the corporate tax rate is 40 percent, what is the minimum after-tax cash flow that would make the investment acceptable to Ace?

  A. $2,375
  B. $15,942
  C. $5,000
  D. $10,831
  E. $9,450
  E. $9,450

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  Explanation

  $105,000 = CF(AT)/0.09; CF(AT) = $9,450.

• Question 3538:

  Which of the following would not have an influence on the optimal dividend policy?

  A. The costs associated with selling new common stock.
  B. All of these statements can have an effect on dividend policy.
  C. Bond indenture constraints.
  D. A strong shareholders' preference for current income versus capital gains.
  E. The possibility of accelerating or delaying investment projects.
  B. All of these statements can have an effect on dividend policy.

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  Explanation

  The optimal payout ratio is a function of 4 factors:

  1. Investors' preferences for dividends versus capital gains.

  2. The firm's investment opportunities.

  3. The firm's target capital structure.

  4. The availability and cost of external capital.

• Question 3539:

  The Prudent Man Rule states that the trustee must achieve an equitable balance between current income and the ________ of principal in ________.

  A. prudent management; in money markets
  B. preservation; real terms
  C. steady growth; nominal terms
  D. preservation; nominal terms
  E. prudent management; in fixed-income securities
  F. steady growth; real terms
  B. preservation; real terms

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  Explanation

  Under the Prudent Man Rule, trustees must be impartial between income beneficiaries and remainder men and must achieve an equitable balance between current income and the preservation of principal in real terms.

• Question 3540:

  An investor has two stocks, Stock R and Stock S in her portfolio. What is the standard deviation of the portfolio given the following information about the two stocks?

  A. 0.0056.
  B. 0.0867.
  C. 0.2944.
  D. 0.0208.
  C. 0.2944.

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  Explanation

  Standard deviation of a two-stock portfolio = [W1212+ W2222+ 2W1W212r1,2]1/2=[(.8)2(.34)2+ (.2)2(.16)2+ 2(.8)(.2)(.34)(.16)(.67)]1/2= 0.29439