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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3781:

  Which value of r indicates the strongest correlation than 0.40?

  A. +0.48
  B. -0.50
  D. -0.30
  E. None of these answers
  B. -0.50

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  Explanation

  The bigger the absolute value of r, the stronger the correlation. The sign +/- just shows the direction, not the strength.

• Question 3782:

  Which of the following statements is false in reference to confidence intervals and/or tests of significance?

  A. As the confidence level increases, the area between the upper confidence limit and the lower confidence limit increases.
  B. More than one of these answers is false.
  C. The significance level is denoted by the Greek letter alpha.
  D. The significance level is typically measured by (1 - the probability of a Type II error).
  E. As the confidence level increases, the power of the does not necessarily increase.
  F. Significance levels are typically set equal to 0.10, 0.05, and 0.01.
  D. The significance level is typically measured by (1 - the probability of a Type II error).

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  Explanation

  In most statistical tests, the significance level is equal to one minus the probability of a Type I error. The Type I error is given much more attention in hypothesis testing than is the Type II error, and this is partially because of the inherent difficulty in quantifying the probability of a Type II error. Remember that a Type II error occurs when one incorrectly fails to reject the null hypothesis. Reliably predicting this occurrence is difficult. Conversely, determining the probability of a Type I error requires much less effort and is subject to much less estimation bias. The remaining answers are correct.

• Question 3783:

  A project requires an initial outlay of 650. It also needs capital spending of 700 at the end of year 1 and 900 at the end of year 2. It has no revenues for the first 2 years but receives 1,200 in year 3, 1,600 in year 4 and 2,300 in year 5. The project's cost of capital is 10%. The discounted payback period equals ________.

  A. 2. 26 years
  B. 4. 02 years
  C. 3. 19 years
  D. 3. 46 years
  B. 4. 02 years

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  Explanation

  The cash flows of the project starting at the end of year 1 are:

  -700, -900, +1,200, +1,600, +2,300

  The discounted payback period is defined as the expected number of years that would be required to recover the original investment using discounted cash flows. The discounted cash flow at the end of year N is obtained by dividing that

  year's cash flow by 1.1N, since the project's cost of capital is 10%. Using this, the discounted cash flows are:

  -636, -744, +902, +1,093, +1,428.

  Recovery occurs in the 5th year. At the beginning of the 5th year, the outstanding balance equals 650 + 636 + 744 - 902 - 1093 = 35. Therefore, the discounted payback period = 4 + 35/1428 = 4. 02 years.

• Question 3784:

  Standard IV (B.5), Preservation of Confidentiality states:

  A. all of these answers.
  B. none of these answers.
  C. members must release information to AIMR when the Professional Conduct Program is holding an investigation, unless there is a settlement agreement between the parties that stipulates confidentiality.
  D. if the information is confidential, even illegal activity may not be reported, because there is the issue of trust between parties.
  E. members should avoid disclosing any information received from a client except to authorized fellow employees who are also working for the client.
  E. members should avoid disclosing any information received from a client except to authorized fellow employees who are also working for the client.

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  Explanation

  Under Standard IV (B.5), members shall preserve the confidentiality of information communicated by clients within the scope of client-member or employer-member relationship, except when the member receives information concerning illegal activity on the part of the client. When there is an investigation under PCP, members shall provide information about a client in support of the investigation. Settlement agreements with confidentiality clauses do not prohibit members from cooperating with a PCP investigation.

• Question 3785:

  If the amount of money in circulation is $200 million and the nominal GDP is $950 million, then the money velocity is ________.

  A. 1.90
  B. 4. 75
  C. 0.21
  D. 19.0
  B. 4. 75

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  Explanation

  Velocity of money is defined as GDP divided by the stock of money. It is simply the average number of times a dollar is used to purchase a final product or service during a year. Thus, $950 million divided by $200 million equals 4. 75.

• Question 3786:

  The balance sheet of Firm A shows the following:

  Cash and Cash equivalents 432 Receivables 98 Inventories 143 Marketable securities 329 Short-term loans 732 Current portion of long-term debt 210

  The quick ratio of the firm equals ________.

  A. 0.91
  B. 4. 09
  C. 1.17
  D. 0.83
  A. 0.91

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  Explanation

  The quick ratio is the current ratio calculated using only relatively liquid securities. These current assets are cash, marketable securities and receivables. Thus, Quick ratio = (cash + marketable securities + receivables)/current liabilities In this case, Quick ratio = (432+98+329)/(732+210) = 0.91

• Question 3787:

  Rob Pirate is considering investing in a subordinated tranche in a collateralized mortgage obligation (CMO). If Pirate wishes to measure his interest rate risk for this debt security, which measure would be most appropriate!

  A. Modified duration
  B. Effective duration
  C. Effective convexity
  B. Effective duration

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  Explanation

• Question 3788:

  Jumbotron's accountant has mistakenly understated depreciation by 125 and understated accounts payables by 65. Jumbotron's tax rate is 40%. Which of the following is/are true?

  I. Assets are overstated by 125

  II. Income is overstated by 125

  III. Current liabilities are understated by 65

  IV.

  Operating cash flow is understated by 125

  A. III only
  B. I and III
  C. none of them
  D. II, III and IV
  B. I and III

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  Explanation

  If depreciation is understated by 125, the income is actually overstated by 125*(1-tax rate) = 75. The understatement of accounts payables does not affect the income statement; it understates the reported current liabilities. It also affects the operating cash flow. Note that operating cash flow = net income + noncash expenses - non-cash revenues - cash reductions in operating accounts Since income is overstated by 75, a non-cash expense (depreciation) is understated by 125 and another non-cash expense (accounts payable) is understated by 65, operating cash flow is understated by -75 + 125 + 65 = 115.

• Question 3789:

  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, if New Gestalt had 300,000 warrants with a strike of 36 outstanding instead of the convertible bonds, the number of shares used in Diluted EPS would equal ________.

  A. 200,000
  B. 223,077
  C. 312,648
  D. 500,000
  B. 223,077

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  Explanation

  Since the strike price of 36 on the warrants is less than the average stock price of 39, the warrants are dilutive. Using the Treasury stock method, the additional shares due to warrant exercise = 300,000*(1 - 36/39) = 23,077. Total number of shares used in Diluted EPS = 200,000 + 23,077 = 223,077.

• Question 3790:

  An increase in the tax rate, while holding everything else equal, would have what effect on the earnings multiple of a stock market series? Further, what effect should be anticipated from an increase in the depreciation per-share figure?

  A. Earnings multiple would increase, earnings multiple would increase.
  B. Earnings multiple would increase, earnings multiple would increase.
  C. Earnings multiple would remain unchanged, earnings multiple would decrease.
  D. Earnings multiple would decrease, earnings multiple would decrease.
  E. Earnings multiple would decrease, earnings multiple would remain unchanged.
  F. Earnings multiple would increase, earnings multiple would remain unchanged.
  D. Earnings multiple would decrease, earnings multiple would decrease.

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  Explanation

  The following equation is used to determine the earnings multiple of a stock market series:

  EPS = {[(Sales per share * operating profit margin) - depreciation per share - interest expense per share] * (1 - corporate tax rate).

  As you can see, an increase in the tax rate, holding everything else equal, will lead to a decrease in the earnings multiple. Likewise, an increase in the per-share depreciation figure will lead to a decrease in the earnings multiplier.