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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3711:

  Relative to the French franc, the dollar has over the period 1973 to 1993:

  A. fallen from a high of 25. 5 francs to the dollar in 1973 to a low of 3. 4 francs to the dollar in 1985 and risen again to 12. 6 francs to the dollar in 1993.
  B. none of these answers.
  C. fallen from a high of 22. 5 francs to the dollar in 1973 to a low of 11.1 francs to the dollar in 1985 to 17. 6 francs to the dollar in 1993.
  D. risen from 22. 5 francs to the dollar in 1973 to 35. 2 francs to the dollar in 1985 to 40.5 francs to the dollar in 1993.
  E. has remained relatively stable around 15 francs to the dollar.
  C. fallen from a high of 22. 5 francs to the dollar in 1973 to a low of 11.1 francs to the dollar in 1985 to 17. 6 francs to the dollar in 1993.

  ---

  Explanation

  The U.S. dollar has moved greatly over this period relative to the French franc. The dollar fell from a high of 22. 5 francs to the dollar in 1973 to a low of 11.1 francs to the dollar in 1985 and then rose again to 17. 6 francs to the dollar in 1993.

• Question 3712:

  Suppose Congress votes to raise the personal tax rate on interest and dividend income. However, it does not change the capital gains tax or the corporate tax rates. This will have the effect of:

  A. increasing the reliance on debt financing.
  B. increasing the reliance on retained earnings as capital.
  C. decreasing the reliance on equity capital.
  D. decreasing the sizes of seasoned equity offerings.
  B. increasing the reliance on retained earnings as capital.

  ---

  Explanation

  As personal tax rates increase, firms have to modify their reliance on different capital markets so as to minimize the costs imposed on debt and equity investors. An increase in interest and dividend income makes debt and dividend payouts costlier. On the other hand, since capital gains are not affected, firms will tend to decrease their dividend pay-out ratios and bank on retained earnings to finance their capital requirements.

• Question 3713:

  Under Standard III (E) - Responsibilities of Supervisors - which of the following are NOT employees that are covered under this standard?

  A. Level I CFA candidates
  B. CFA charterholders
  C. None of these answers
  D. Non AIMR members
  E. CFA candidates
  F. AIMR members
  D. Non AIMR members

  ---

  Explanation

  As long as investment professionals have employees subject to their control or influence - whether or not the employees are AIMR members, CFA charterholders or candidates for the CFA designation - they exercise supervisory responsibility and hence, are subject to Standard III (E). The non-AIMR members themselves are not subject to compliance.

• Question 3714:

  New Gestalt, Inc., a software firm had a net income of 1.7 million last year. It has 200,000 common shares and 300,000 convertible bonds with face value of 100 outstanding. The convertible bonds carry a coupon of 4% and can be converted one-for-one. The average stock price last year was 39 and the maximum price was 57. The effective interest rate on the convertible debt is 8%. New Gestalt issued 100,000 preferred shares with face value 100 and a coupon of 5% on March 31st of last year. Assume the convertible bonds are dilutive and that New Gestalt faces a 30% tax rate. Given the above, New Gestalt's Diluted EPS equals ________.

  A. 7. 45
  B. 2. 65
  C. 6. 01
  D. 7. 51
  C. 6. 01

  ---

  Explanation

  Diluted EPS = (Net Income - Preferred dividends + interest on convertibles net of taxes)/(weighted # of common shares assuming convertible conversion) In this case, numerator = 1.7 million - 375,000 + 300,000*8%*100*(1-30%) = 3,005,000. The denominator equals 200,000 + 300,000 = 500,000. Therefore, Diluted EPS = 6. 01. Note that the interest expense on the convertible bond is calculated using the effective interest rate, not the coupon rate.

• Question 3715:

  Which of the following statements regarding hypothesis testing is false?

  A. The F-statistic is used in multivariate quantitative analysis.
  B. More than one of these answers is incorrect.
  C. If the null hypothesis is rejected, then it is said the result is "not statistically significant."
  D. If the population standard deviation is unknown, then the standard error of the estimate is found by dividing the sample standard deviation by the square root of "n."
  E. The power of a test is usually equal to (1 - the probability of a Type II error).
  F. In quantitative analysis, the Type I error is defined as the act of incorrectly rejecting the null hypothesis.
  C. If the null hypothesis is rejected, then it is said the result is "not statistically significant."

  ---

  Explanation

  Remember that when the null hypothesis is rejected, the results of the regression are said to be "statistically significant." In other words, the analyst has enough reason to assume that the results of the analysis are valid at the given level of significance. When the analyst fails to reject the null hypothesis, then the result is said to "not be statistically significant." While this specification may seem excessive, it is nevertheless important. The remaining answers are all correct.

• Question 3716:

  Items reported as prior-period adjustments

  A. do not include the effect of a mistake in the application of accounting principles as this is accounted for as a change in accounting principle rather than a prior-period adjustment.
  B. do not affect the presentation of prior-period comparative financial statements.
  C. are reflected as adjustments of the opening balance of the retained earnings of the earliest period presented.
  D. none of these answers.
  E. do not require further disclosure in the body of financial statements.
  C. are reflected as adjustments of the opening balance of the retained earnings of the earliest period presented.

  ---

  Explanation

  Prior-period adjustments are made for the correction of errors. All the effects of errors on prior-period financial statements are reported as adjustments to beginning retained earnings for the earliest period presented in the retained earnings statement.

• Question 3717:

  Which of the following is not involved in the estimation of the earnings per share (EPS) for a stock market series?

  A. Estimate next year's operating profit.
  B. Estimate next year's interest expense.
  C. Estimate next year's corporate tax rate.
  D. Estimate the sales per share of the series.
  E. Estimate next year's depreciation per share.
  F. Estimate next year's dividend payout ratio.
  F. Estimate next year's dividend payout ratio.

  ---

  Explanation

  While somewhat intuitively appealing, the estimation of next year's dividend payout ratio is not necessary when determining the anticipated EPS for a stock market series. The other five choices represent all the necessary steps in the estimation process.

• Question 3718:

  Macro techniques are based on the relationship between the economy and ________ markets.

  A. international
  B. none of these answers
  C. micro
  D. security
  D. security

  ---

  Explanation

  Macro techniques are based on the strong relationship between the economy and security markets. These models base their market projections on their outlook for the aggregate economy and certain components. Micro techniques estimate future market values by applying basic valuation models to equity markets.

• Question 3719:

  Consider the following transactional information for the investment account of a retail investor:

  1st Quarter Ending portfolio value: $65,000 Total amount invested: $59,000

  2nd Quarter Ending portfolio value: $63,500 Total amount invested: $65,000

  3rd Quarter Ending portfolio value: $60,900 Total amount invested: $63,500

  4th Quarter Ending portfolio value: $57,200 Total amount invested: $60,900

  Using this information, what is the annual time-weighted rate of return for this portfolio? Assume no taxes or transaction charges.

  A. (4. 56%) per year
  B. (3. 05%) per year
  C. 2. 59% per year
  D. The calculation of the time-weighted rate of return cannot be calculated from the information provided
  E. (3. 27%) per year
  F. None of these answers
  B. (3. 05%) per year

  ---

  Explanation

  The time-weighted rate of return is the preferred method of return calculation in the investment management industry, primarily because this method is not sensitive to significant additions and withdrawals of funds from portfolios under

  examination. The calculation of the time-weighted rate of return involves three steps, which are illustrated as follows:

  Step 1:

  Price the portfolio immediately prior to any significant additions or withdrawals. Separate the portfolio into a series of subperiods based on the dates of cash inflows and outflows.

  Step 2:

  Calculate the holding period return for each subperiod.

  Step 3:

  Determine the annualized holding period return by linking or compounding the holding period return of each subperiod. If the investment is for more than one year, use the geometric mean of the annual returns as the time-weighted rate of

  return. If the investment is for less than one year, compound the subperiod returns to obtain an annualized measurement.

  To begin the process of determining the time-weighted rate of return, we would break the portfolio up into the following series of cash flows. However, in this example, the cash flows are already aggregated for us and we can move on to the

  next step: determining the holding period return for each subperiod. This process is detailed as follows:

  Quarter 1 holding period return = [($65,000 ending value - $59,000 invested) / $59,000 invested] = 10.169%

  Quarter 2 holding period return = [($63,500 ending value - $65,000 invested) / $65,000 invested] = (2. 308%)

  Quarter 3 holding period return = [($60,900 ending value - $63,500 invested) / $63,500 invested] = (4. 094 %)

  Quarter 4 holding period return = [($57,200 ending value - $60,900 invested) / $60,900 invested] = (6. 076%)

  Now that the holding period return for each subperiod has been determined, we must annualize the return measure by taking the product of all four quarterly returns. This process is illustrated below:

  [(1 + .10169) * (1 - .02308) * (1 - .04094) * (1 - .06076) - 1] = (.0305) or (3. 05%)

  When calculating the time-weighted rate of return, remember that the total amount invested is the relevant figure, not the beginning portfolio value. So said, whenever possible you should use the total amount invested rather than the

  beginning portfolio value in the calculation of the subperiod holding period return.

• Question 3720:

  Which of the following is not an example of an inflationary change in prices?

  I. A car dealer decides to charge more for a new model year of cars because of new features

  II. A university decides to increase tuition to pay for a new athletic field

  III.

  An electronics retailer charges more for new DVD players than for outdated VCRs

  A. I, II
  B. I, III
  C. I only
  D. II, III
  E. II only
  F. None of these answers is correct
  F. None of these answers is correct

  ---

  Explanation

  Prices for goods can increase for reasons other than inflation. Inflationary price increases are the result of too many dollars chasing too few goods. These examples are price increases that are the result of improvements in the good being purchased.