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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3641:

  Various countries' securities laws permit a manager to pay up for goods and services without violating the manager's fiduciary duty, so long as the requirements of the law are followed. Each of the following are typical requirements, except:

  A. the manager's soft-dollar practice must be disclosed.
  B. the manager may seek satisfactory price and execution.
  C. the goods or services purchased must be for "research service."
  D. none of these answers.
  E. the commission paid must be reasonable in relation to the research and execution services received.
  B. the manager may seek satisfactory price and execution.

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  Explanation

  The manager must seek BEST price and execution.

• Question 3642:

  Clay Industries, a diversified industrial firm, is considering investing into a new manufacturing facility which would allow the Company to expand its operations into a promising new market for industrial motors, specifically the High Temperature Superconducting, or HTS motors. This project is one of many currently under consideration for Clay Industries, and the amount of RandD expense allocated toward researching this new manufacturing facility is residual in nature. The following information applies to this new project. RandD expense for the quarter $15,000 Initial cash outlay $45,000 t1: ($40,000) t2: ($10,000) t3: $40,000 t4: $40,000 t5: $16,000 t6: $25,000 Assuming no taxes and a $0.00 salvage value at t6, what is the MIRR of this project?

  A. This project will have multiple MIRR at any discount rate
  B. 7. 038%
  C. The MIRR cannot be calculated due to the fact that no discount rate has been provided
  D. The MIRR cannot be calculated due to the fact that the project has uneven cash flows
  E. 2. 639%
  C. The MIRR cannot be calculated due to the fact that no discount rate has been provided

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  Explanation

  In order to calculate the Modified Internal Rate of Return, a explicit discount rate must be given. In this example, the MIRR cannot be calculated due to the fact that no discount rate has been provided. Remember that while the Internal Rate of Return is calculated without the use of an explicit discount rate, the Modified Internal Rate of Return requires some figure for the cost of capital.

• Question 3643:

  If the variance of a probability distribution was computed to be 3. 6, what is the standard deviation?

  A. 6. 0
  B. 1.9
  C. None of these answers
  D. 0.6
  E. 12. 96
  B. 1.9

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  Explanation

  Standard deviation is the square root of the variance.

• Question 3644:

  When a firm uses no debt,

  A. its financial risk equals its business risk.
  B. its business risk equals the market risk.
  C. all of these answers.
  D. its ROA equals its ROE.
  D. its ROA equals its ROE.

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  Explanation

  With no debt, total capital equals total equity, giving ROA = ROE. Note that without debt, financial risk is zero since financial risk is defined as the additional risk caused due to debt in the capital structure. Market risk is the systematic risk arising from the correlation of the firm's stock price with the market and is different from business risk.

• Question 3645:

  If you were to argue that the firm's cost of equity increases as the dividend payout decreases, you would be making an argument ________ with MM's dividend irrelevance theory, and ________ with Gordon and Lintner's "bird-in-the-hand" theory.

  A. consistent; consistent
  B. consistent; inconsistent
  C. the argument does not make sense; neither theory involves the cost of equity capital
  D. inconsistent; consistent
  E. inconsistent; inconsistent
  D. inconsistent; consistent

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  Explanation

  The main conclusion of MM's irrelevance theory is that dividend policy does not affect the required rate of return on equity. Gordon-Lintner disagreed stating that k(s) decreases as the dividend payout is increased because investors are less certain of receiving the capital gains which should result from retaining earnings than they are of receiving dividends. They said that investors value expected dividends more highly than expected capital gains because the dividend yield is less risky than the growth component in the total expected return equation, k(s) = D1/Po + g. MM disagreed and theorized that k(s) is independent of dividend policy, implying that investors are indifferent between dividends and capital gains. MM called the Gordon-Lintner's study the bird-in-the- hand fallacy, because MM thought the riskiness of the firm's cash flows to investors in the long run is determined by the riskiness of the operating cash flows, not by dividend policy.

• Question 3646:

  Laleh Mali conducts a stock transaction with the following characteristics:

  Which of the following statements about Mali's trade is least likely to be correct? Mali placed her order in:

  A. a continuous market.
  B. an order driven market.
  C. conjunction with a short sale.
  D. the secondary market.
  D. the secondary market.

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  Explanation

  Seasoned issues are new issues by a firm whose shares are already traded on the exchange and are traded in the primary market. The other statements are likely true. Note that stop buy orders are often placed to protect a short sale from a rising market.

• Question 3647:

  According to the framework for real estate analysis, one determinant of value is demand. Which of following is not a subset of "demand"?

  A. Economic base
  B. Target market potential
  C. Mortgage financing conditions
  D. Sources of competition
  E. Tenant preferences
  F. None of these answers
  D. Sources of competition

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  Explanation

  Sources of competition, along with market structure and inventorying competitors are SUPPLY determinants of value.

• Question 3648:

  Growth companies are:

  A. all of these answers.
  B. companies whose shares generate returns higher than stocks with similar risks.
  C. companies that have consistently above-average sales and earnings.
  D. companies that have management abilities and investment opportunities that yield rates of return higher than the required rate of return.
  D. companies that have management abilities and investment opportunities that yield rates of return higher than the required rate of return.

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  Explanation

  Growth companies need not have stocks that generate higher than required rates of return. They have rates of return on their investments which are higher than that required by the risks in the investments since the market impounds all available information in the stock price. Further, growth companies are measured in terms of the growth and not the level of sales and earnings.

• Question 3649:

  According to Standard IV (B.7), Disclosure of Conflicts, service on a board of directors poses which of the following as a basic conflict of interest?

  A. Fiduciary duties owed to clients and the duties owed to shareholders.
  B. None of these answers.
  C. All of these answers.
  D. Investment personnel who serve as directors may receive securities or the option to purchase securities of the company as compensation for serving on the board.
  E. Opportunity to receive material nonpublic information.
  C. All of these answers.

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  Explanation

  Under Standard IV (B.7), service as a director poses all three statements as basic conflicts of interest. Hence, when members providing investment service serve also as directors, they should be isolated from those making investment decisions by the use of Fire Walls or similar restrictions.

• Question 3650:

  Under AIMR Rules of Procedure for the Proceeding Related to Professional Conduct, membership in AIMR and/or the right to hold and to use the CFA designation may be summarily suspended by AIMR's Designated Officer for the following misconduct:

  I. Conviction for a crime that is defined as a felony or its equivalent.

  II. Indefinite bar from registration under the securities laws (even though reapplication may be made after a specific period of time).

  III.

  Failure to complete and return a professional conduct statement for each of two successive years.

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

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  Explanation

  This question relates to AIMR's summary suspension powers as defined in the Bylaws under the Professional Conduct Program. Statements I, II and III describe grounds for summary suspension of membership in AIMR and/or the right to hold and use the CFA designation.