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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3651:

  In the country of Merlenia, authorities require that tax reports and financial reports be identical. In Merlenia, there will be:

  A. no recognition of deferred taxes.
  B. a prevalence of LIFO accounting.
  C. no advantage to capitalizing a lease.
  D. no off-Balance-sheet financing.
  A. no recognition of deferred taxes.

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  Explanation

  Deferred taxes arise out of temporary differences between tax reports and financial statements. To account for such differences under accrual accounting, deferred tax assets or liabilities are generated in accordance with the Matching Principle.

• Question 3652:

  The phrase, "GDP equals what you eat plus what you invest plus what you export" characterizes which of the following methods?

  A. Expenditure approach.
  B. Income-cost approach.
  C. Consumption-investment approach.
  D. Resource cost-income approach.
  A. Expenditure approach.

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  Explanation

  The Expenditure approach has four components:

  1. Personal consumption expenditure.

  2. Gross private domestic investment (investments by people residing outside the country are ignored, even if they happen to be citizens of the country).

  3. Government consumption and investment.

  4. Net exports.

  These can be summarized as "GDP equals what you eat plus what you invest plus what you export."

• Question 3653:

  Using the data in the following table, calculate the national beta for Country A and Country B and determine which country is most likely an emerging market. Note: rx, U.S. represents the correlation coefficient between Country X and the U.S. index.

  Which of the following statements about Country A and Country B is FALSE?

  A. Country B is most likely an emerging market.
  B. The national beta for Country A is less than the beta for Country B.
  C. The national beta for Country B equals 0.82.
  D. Adding either country to a domestically-only diversified portfolio will reduce overall risk.
  A. Country B is most likely an emerging market.

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  Explanation

  The equation for the national beta is as follows:

  As shown above, the beta for Country A is less than the beta for Country B. Country A is most likely the emerging market because of its lower correlation with the U.S, the lower Beta, and the higher risk (standard deviation). Because of the low correlations with the U.S. market, adding either asset to a domestically-only diversified portfolio will reduce risk. The principle of diversification holds even for risky assets.

• Question 3654:

  If the money supply is held constant, an increase in nominal GDP leads to ________ in the velocity of money.

  A. all of these answers are possible.
  B. no change
  C. a decrease
  D. an increase
  D. an increase

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  Explanation

  The velocity of money, V, satisfies the equation, MV = GDP, where M is the money supply. If M is held constant while GDP increases, then V must increases. Intuitively, this says that if the money supply is not changed, then for production and consumption of a higher GDP, each dollar must change hands more frequently.

• Question 3655:

  The upside-downside volume ratio is equal to

  A. the total number of share prices on an exchange increasing divided by the number of share prices decreasing. Technical analysts consider ratio values of 2. 00 or greater to be indicative of an oversold market.
  B. the total volume of shares increasing on an exchange divided by the total volume of shares decreasing. Technical analysts consider ratio values of 1.25 or greater to be bullish.
  C. the total volume of shares increasing on an exchange divided by the total volume of shares decreasing. Technical analysts consider ratio values of 0.70 or less to be indicative of an oversold market.
  D. the total number of share prices on an exchange increasing divided by the number of share prices decreasing. Technical analysts consider ratio values of 1.25 or greater to be indicative of excessive market speculation.
  E. the total number of share prices on an exchange increasing divided by the number of share prices decreasing. Technical analysts consider ratio values of 2. 00 or greater to be indicative of excessive market speculation.
  C. the total volume of shares increasing on an exchange divided by the total volume of shares decreasing. Technical analysts consider ratio values of 0.70 or less to be indicative of an oversold market.

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  Explanation

  Technicians use the upside-downside volume ratio as an indicator of short-term momentum for the market. The ratio typically ranges between 0.50 and 2. 00. Ratio values of 1.25 or greater are viewed as bearish, while values of 0.70 or less are viewed as bullish.

• Question 3656:

  Technical analysts would feel that an upside-downside volume ratio with a value of 1.04

  A. is bearish.
  B. indicates that the market is overbought.
  C. indicates that the market is oversold.
  D. is neither particularly bullish nor bearish.
  D. is neither particularly bullish nor bearish.

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  Explanation

  Technical analysts may use the ratio of upside-downside volume as an indicator of short-term momentum for the market. They feel that a ratio value of 1.50 or more indicates that the market is overbought, while a ratio of 0.70 or less indicates that the market is oversold.

• Question 3657:

  The Standards state that when presenting material to others, members shall not "copy or use, in substantially the same form as the original, material prepared by another without acknowledging and identifying the name of the author, publisher, or source of such material." The analyst may use information from other sources without acknowledgment, however, if the information:

  A. is factual information published in recognized financial and statistical reporting services.
  B. does not include a buy or sell recommendation.
  C. was originally communicated verbally.
  D. is being reported only to the member's employer or associates.
  A. is factual information published in recognized financial and statistical reporting services.

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  Explanation

  This question relates to Standard II (C), Prohibition against Plagiarism, which states that members may use factual information published in recognized financial and statistical reporting services without attribution. Even if the information is communicated verbally, members must use proper attribution of the material. Whether or not the plagiarized material is combined with a buy/sell recommendation or reported only to the member's employer or associates does not change the fact that the member is copying material without acknowledgment.

• Question 3658:

  Milton Manufacturing has an outstanding issue of preferred stock that pays a $1.15 annual dividend. This dividend is not assumed to change in the future, and similar investments are currently warranting a13. 75% per year return. What is the value of Milton Manufacturing's preferred stock? Further, does this value represent a perpetuity or a finite series of cash flows?

  A. $33. 33; finite series of cash flows
  B. $10.99; perpetuity
  C. $8.36; perpetuity
  D. $10.99; finite series of cash flows
  E. $8.36; finite series of cash flows
  C. $8.36; perpetuity

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  Explanation

  Preferred stock is commonly valued as a perpetuity using the following equation: {P0 = [d1 / k]}

  Where: P0 = the price of the preferred stock at time 0, d1 = the annual dividend at t = 1, and k = the required rate of return.

  In this example, the dividend is provided as an annual figure, so all of the necessary information has been given. The calculation of the value of this preferred stock is found as follows:

  {P0 = [$1.15 / 0.1375] = $8.36.

  Preferred stock is commonly valued as a perpetuity because there is no finite conclusion to the projected series of cash flows for a preferred stock. Unlike a bond, whose cash flows are characterized by a finite lifespan (i.e. the cash flows of a

  bond cease at maturity), the cash flows (dividends) produced by a preferred stock could theoretically last forever.

• Question 3659:

  An analyst makes the following two statements about the assumptions underlying the use of the efficient frontier to construct an optimal portfolio of assets.

  Statement 1:Investors believe all investments are represented by a probability distribution of expected returns.

  Statement 2:Investors base investment decisions solely on the expected risk of the investment-Determine whether each statement correctly describes one of the assumptions.

  A. Only Statement 1 is correct.
  B. Only Statement 2 is correct.
  C. Both Statement 1 and 2 are correct.
  A. Only Statement 1 is correct.

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  Explanation

• Question 3660:

  Copybold Corporation is a start-up firm considering two alternative capital structures--one is conservative and the other aggressive. The conservative capital structure calls for a D/A ratio = 0.25, while the aggressive strategy call for D/A =

  0.75. Once the firm selects its target capital structure it envisions two possible scenarios for its operations: Feast or Famine. The Feast scenario has a 60 percent probability of occurring and forecast EBIT in this state is $60,000. The Famine state has a 40 percent chance of occurring and the EBIT is expected to be $20,000. Further, if the firm selects the conservative capital structure its cost of debt will be 10 percent, while with the aggressive capital structure its debt cost will be 12 percent. The firm will have $400,000 in total assets, it will face a 40 percent marginal tax rate, and the book value of equity per share under either scenario is $10.00 per share. What is the difference between the EPS forecasts for Feast and Famine under the aggressive capital structure?

  A. $0
  B. $2. 20
  C. $2. 40
  D. $1.00
  E. $1.80
  C. $2. 40

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  Explanation

  Debt = 75% = $300,000; Equity = 25% = $100,000; Total assets = $400,000. FeastFamine Probability0.60.4 EBIT$60,000$20,000 Less: Interest36,00036,000 EBT$24,000-$16,000 Less: Taxes9,600-6,400 NI$14,400-$9,600 # shares10,00010,000 EPS$1.44-$0.96 Difference in EPS for conservative capital structure: EPS(Feast) - EPS(Famine) = $1.44 - (-$0.96) = $2. 40