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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3561:

  If you deposit $7,000 into an account paying 6% per year, compounded annually, how much do you have in the account in 20 years?

  A. $15,938.48
  B. $23,403. 52
  C. $20,800.00
  D. $22,470.62
  E. $22,449.95
  E. $22,449.95

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  Explanation

  On the BAII Plus, press 20 N, 6 I/Y, 7000 PV, 0 PMT, CPT FV. On the HP12C, press 20 n, 6 i, 7000 PV, 0 PMT, FV. Note that the answer will be displayed as a negative number. Make sure that the BAII Plus has the P/Y value set to 1.

• Question 3562:

  Net returns on mutual funds have tended to be

  A. much higher than the market return.
  B. slightly higher than the market return.
  C. slightly lower than the market return.
  D. much lower than the market return.
  C. slightly lower than the market return.

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  Explanation

  Most funds have not provided net returns superior to a buy-and-hold strategy that tries to emulate the aggregate market. The shortfall of performance has been about 1 percent a year, which is roughly equal to the average cost of research and trading commissions for mutual funds.

• Question 3563:

  Which of the following statements is most correct?

  A. Suppose a firm is losing money and thus, is not paying taxes, and that this situation is expected to persist for a few years whether or not the firm uses debt financing. Thus the firm's after-tax cost of debt will equal its before-tax cost of debt.
  B. The bond-yield-plus-risk-premium approach to estimating a firm's cost of common equity involves adding a subjectively determined risk-premium to the market risk-free bond rate.
  C. The reason that a cost of capital is assigned to retained earnings is because these funds are already earning a return in the business, the reason does not involve the opportunity cost principle.
  D. The component cost of preferred stock is expressed as k(ps)(1 - T), because preferred stock dividends are treated as fixed charges, similar to the treatment of debt interest.
  E. All of these statements are false.
  A. Suppose a firm is losing money and thus, is not paying taxes, and that this situation is expected to persist for a few years whether or not the firm uses debt financing. Thus the firm's after-tax cost of debt will equal its before-tax cost of debt.

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  Explanation

  Obviously if the firm is paying no taxes, its after-tax cost of debt will equal its before-tax cost of debt.

• Question 3564:

  Assume the following information about a manufacturing company. Sales / total assets = 0.85 Net income / sales = 0.14 Total assets / common equity = 2. 2 Dividend payout ratio = 0.50

  What is the expected annual growth rate of this firm's dividends?

  A. 6. 55%
  B. The answer cannot be determined from the information provided.
  C. 18.07%
  D. 13. 09%
  E. 12. 15%
  D. 13. 09%

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  Explanation

  A popular model for determining the growth rate of dividends is the following: g = RR * ROE Where: g = the expected growth rate of dividends, RR = the retention rate (this is equal to 1 - dividend payout ratio), and ROE = the return on equity. Although it may at first appear otherwise, all of the necessary information has been provided. Remember the Du Pont decomposition process for ROE, which breaks down the ROE figure into the following:

  ROE = (Net Income / Sales) * (Sales / Total Assets) * (Total Assets * Common Equity)

  Mathematically, this will break down into (Net Income / Common Equity), the ROE figure. The calculation of the return on equity for this company is as follows:

  ROE = [0.14 * 0.85 * 2. 2] = 0.2618, or 26. 18%.

  Now that the ROE figure has been determined, the calculation of the growth rate of dividends is as follows:

  g = [(1 - 0.50) * 0.2618] = 13. 09%

• Question 3565:

  Taxes must be recognized

  A. in the same period as when the taxable event occurred.
  B. on a quarterly basis.
  C. in the period immediately following the period in which the taxable event occurred.
  D. on a yearly basis.
  A. in the same period as when the taxable event occurred.

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  Explanation

  Taxes must be recognized in the same period as when the taxable event occurred. This is a requirement for calculation of returns.

• Question 3566:

  In the successful effort method, oil firms:

  I. are required to expense all oil-drilling costs resulting in dry holes.

  II. can capitalize drilling costs which result in productive oil wells.

  III. are required to capitalize all oil-drilling costs.

  IV.

  are required to expense all oil-drilling costs.

  A. I only to expense all oil-drilling costs.
  B. I and II
  C. III and IV
  D. II only
  B. I and II

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  Explanation

  In extractive industries, firms are allowed to use either the full-cost method, in which all search and development costs can be capitalized, or the successful-efforts method, where all such costs are expensed unless they result in revenue-generating assets, in which case, they are capitalized. If an oil drilling firm uses the successful-efforts method, it expenses costs incurred on dry holes and capitalizes those resulting in oil-producing wells.

• Question 3567:

  What annual simple interest rate would cause a $105 deposit to grow to $125 in 15 months?

  A. 7. 89%
  B. 15. 24%
  C. 20%
  D. 13. 14%
  E. 14. 17%
  B. 15. 24%

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  Explanation

  To solve this question, we have to rearrange the simple interest formula, I=PRT so that the R is by itself. Note that the I (interest) is equal to 20 (125 - 105). Note also that the time component T of the formula is 15/12. On the BAII Plus, press 20 divide 105 divide 15 x 12 = to see the answer. On the HP12C, press 20 ENTER 105 divide 15 divide 12 x to see the answer.

• Question 3568:

  Bond X is a nonmailable corporate bond maturing in ten years. Bond Y is also a corporate bond maturing in ten years, and Bond Y is callable at any time beginning three years from now. Both bonds carry a credit rating of AA. Based on this information, identify the most accurate statement:

  A. Bond Y will have a higher nominal spread over a 10-year U.S. Treasury security than Bond X.
  B. The option adjusted spread (OAS) of Bond Y will be greater than the nominal spread of Bond Y.
  C. The nominal spread of Bond X will be greater than the option adjusted spread of Bond X.
  A. Bond Y will have a higher nominal spread over a 10-year U.S. Treasury security than Bond X.

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  Explanation

• Question 3569:

  Ian Clark, CFA, is a technical analyst. Clark believes that information is incorporated gradually into securities markets and that, as a technician, he can take advantage of this process. However, tests of the efficient market hypothesis indicate

  security returns are random over time and new information is processed rapidly. Clark makes the following statements:

  Statement 1:Studies have reported that small capitalization stock returns are positive on a risk-adjusted basis.

  Statement 2:Although the academic research indicates that markets are weak form efficient, they are not because many technical analysts beat the market.

  Determine whether Clark's statements regarding tests of market efficiency are correct or incorrect.

  A. Both statements arc correct.
  B. Only Statement 1 is correct.
  C. Only Statement 2 is correct.
  B. Only Statement 1 is correct.

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  Explanation

• Question 3570:

  Which of the following AIMR Standards pertains to the use of professional designation?

  A. II (A)
  B. I
  C. III (A)
  D. III (B)
  A. II (A)

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  Explanation

  Standard II (A) - Use of Professional Designation - states the responsibility of AIMR members, CFA charterholders and candidates for the CFA designation to use their professional designations, or their candidacies for the designation, properly and in a manner that does not mislead the investing public or others.