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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3731:

  When complying with Standard IV (B.3) - Fair Dealing, there are certain points one should be sure to address when establishing compliance procedures. Which of the following points is NOT mentioned in the Standards of Practice Handbook?

  A. Disclose levels of service.
  B. Limit the number of people involved.
  C. Shorten the time frame between decision and dissemination.
  D. Establish procedures for determining material change.
  E. Simultaneous dissemination.
  F. Disclose all corporate relationships.
  G. Publish personnel guidelines for predissemination.
  H. Establish control over trading activity.
  F. Disclose all corporate relationships.

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  Explanation

  Under Standard IV (B.3), members have an obligation to ensure that their firms establish compliance procedures requiring all employees who disseminate investment recommendations or actions to treat clients fairly. The number of people privy to an investment recommendation should be limited. Reasonable efforts should be made to limit the amount of time that lapses between the decision and the dissemination of the recommendation. Guidelines must be established to prohibit persons who have prior knowledge from discussing a pending recommendation. Trading activities should be monitored and controlled. Procedures should be established to determine whether a change in an investment recommendation is considered material. The organization should disclose to firms whether or not it offers two or more levels of service to clients for the same or different fees.

• Question 3732:

  Level I verification requires independent attestation that portfolio returns are calculated according to a(n) ________ weighted return methodology.

  A. size
  B. price
  C. time
  D. risk
  E. asset
  C. time

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  Explanation

  Portfolio returns must be calculated according to a time-weighted return methodology with a minimum of quarterly valuation and accrual of income for fixed-income securities.

• Question 3733:

  The trade-off theory of capital structure implies that:

  A. firms issue debt up to the level where the total value added by the debt tax shield is offset by expected bankruptcy costs.
  B. firms will use debt up to the level where the flotation cost of new debt equals that of issuing more equity, thus minimizing the costs of raising capital.
  C. managers are uncomfortable with either too much debt or too much equity and hence, tend to choose debt ratios around 0.40 to 0.60.
  D. none of these answers.
  D. none of these answers.

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  Explanation

  According to the trade-off theory of capital structure, firms issue debt up to the level where the additional value added by the debt tax shield for another dollar of capital raised is offset by expected bankruptcy costs. This ensures that with only these two effects, the firm's stock price is maximized. Clearly, at this point, the total value added by the debt tax shield exceeds the expected bankruptcy costs.

• Question 3734:

  Which of the following statements is most correct?

  A. Investors can interpret a stock repurchase by a firm as a signal that the firm's managers believe the stock is underpriced.
  B. None of these statements are correct.
  C. After a 3-for-1 stock split, a company's price per share will fall and it's number of shares outstanding will rise.
  D. Stock repurchases can be used by firms to defend against hostile takeovers since they increase the proportion of debt in a firm's capital structure.
  E. All of these statements are correct.
  E. All of these statements are correct.

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  Explanation

  These are all correct.

• Question 3735:

  To estimate the risk-free rate for a country, estimate the country's expected ________ and adjust the real risk-free rate for this expectation.

  A. GDP
  B. growth rate of labor productivity
  C. average P/E ratio
  D. rate of inflation
  D. rate of inflation

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  Explanation

  Inflation is risky and needs to be discounted to obtain a true risk-free rate.

• Question 3736:

  The Present Value of a project's cash flows when its cost of capital equals its internal rate of return :

  A. equals zero.
  B. is positive.
  C. is negative.
  D. could be all of these answers.
  B. is positive.

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  Explanation

  The IRR is by definition the discount rate at which the NPV = 0. Therefore, at this point, the PV is greater than zero, since the initial outlay is always non-zero and NPV = PV - cash outlay.

• Question 3737:

  The ages of all the patients in the isolation ward of the hospital are 38, 26, 13, 41 and 22. What is the population variance?

  A. 91.4
  B. 106. 8
  C. None of these answers
  D. 240.3
  E. 42. 4
  B. 106. 8

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  Explanation

  Population variance = (Sum of squared deviation from the mean)/N. the mean is 28. Population variance = (100 + 4 + 225 + 169 + 36)/5 = 534/5 = 106. 8

  xx-mean(x-mean)^2 3810100 26-24 13-15225 4113169 22-636

• Question 3738:

  Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are correct.

  Cash from operating activities$60,000 Net Income(4,000)

  Depreciation(2,000)

  Increase in accounts receivable(1,000)

  Increase in deferred tax liability$53,000

  Cash from investing activities($48,000)

  Purchase of marketable securities2,500

  Dividends received1,500

  Dividends paid($44,000)

  Cash from financing activities(500)

  Increase in Short-term debt(2,500)

  Increase in Long-term debt($3,000)

  Increase in cash$6,000

  The correct change in cash for the year is ________

  A. None of these answers
  B. $19,000
  C. $15,000
  D. $4,000
  B. $19,000

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  Explanation

  $60,000 + $4,000 - $2,000 + $1,000 - $48,000 + $2,500 - $1,500 + $500 + $2,500 = $19,000.

• Question 3739:

  A normal distribution has a mean of -10.8 and a variance of 723. 6. The probability that a value from this distribution will be between -25 and + 25 equals ________.

  A. 0.91
  B. 0.30
  C. 0.61
  D. 0.39
  C. 0.61

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  Explanation

  The standard deviation of the distribution equals sqrt(723. 6) = 26. 9. The z-value of -25 equals (-25 + 10.8)/26. 9 = -0.53. The z-value of + 25 equals (25 + 10.8)/26. 9 = + 1.33. Therefore, the probability that a number Y lies between -25 and + 25 is the same as the z-score lying between -0.53 and + 1.33. Using the Normal probability tables, we get P(z < 1.33) = 0.9082. Getting P(z < -0.53) can be tricky when the table given is only for positive values. To calculate the probability, use the fact that the standard normal distribution is symmetrical about zero. Hence, P(z < - 0.53) = P(z > 0.53) = 1.0 - 0.7019 = 0.2981. The probability that a number Y lies between -25 and + 25 is then given by P(-0.53 < z < 1.33) = P(z < 1.33) P(z < -0.53) = 0.9082 - 0.2981 = 0.61.

• Question 3740:

  Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock, which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Rollins is a constant growth firm, which just paid a dividend of $2. 00, sells for $27. 00 per share, and has a growth rate of 8 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bondyield-plus-risk- premium method to find k(s) (component cost of retained earnings). The firm's net income is expected to be $1 million, and its dividend payout ratio is 40 percent. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 40 percent. What is the firm's cost of retained earnings using the DCF approach?

  A. 14. 1%
  B. 16. 9%
  C. 16. 0%
  D. 16. 6%
  E. 13. 6%
  C. 16. 0%

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  Explanation

  Cost of retained earnings (DCF approach): k(s) = $2. 16/`$27. 00 + 8% = 16. 0%.