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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3831:

  Interest rate expenses

  A. have been increasing more or less continuously. That increase was especially pronounced during the 1980s, when firms increased their debt financing and financial risk. Interest rate expenses as a percentage of sales have also been very volatile.
  B. have increased up to 1989, and have since been decreasing. That decrease is the result of an interest rate decline and of corporations reducing their debt levels. Interest rate expenses as a percentage of sales have also been very volatile.
  C. have been increasing more or less continuously. That increase was especially pronounced during the 1980s, when firms increased their debt financing and financial risk. Interest rate expenses as a percentage of sales have increased from 2. 44% in 1977 to 7. 47% in 1996.
  D. have increased up to 1989, and have since been decreasing. That decrease is the result of an interest rate decline and of corporations reducing their debt levels. Interest rate expenses as a percentage of sales have increased from 1.44% in 1977 to 3. 47% in 1996.
  B. have increased up to 1989, and have since been decreasing. That decrease is the result of an interest rate decline and of corporations reducing their debt levels. Interest rate expenses as a percentage of sales have also been very volatile.

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  Explanation

  Interest rate expenses had increased up to 1989, rising from 1.44% of sales in 1977 to 3. 47% in 1989. That increase was especially pronounced during the 1980s, when firms increased their debt financing and financial risk. That trend started reversing during the 1989-1990 recession because of an interest rate decline, and because of corporations reducing their debt levels. Interest rate expenses are generally fixed, and have therefore varied considerably as a percentage of sales, which are quite volatile.

• Question 3832:

  Real estate must be valued through an independent appraisal at least ________ unless client agreements state otherwise.

  A. once every five years
  B. once every year
  C. once every three years
  D. once every two years
  C. once every three years

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  Explanation

  Real estate must be valued through an independent appraisal at least once every three years unless client agreements state otherwise. Real estate valuations must be reviewed at least quarterly. This is a requirement for calculation of returns.

• Question 3833:

  In the context of the security market line (SML), the expected (or required) return will decrease in the following situations EXCEPT:

  A. The U.S. Federal Reserve takes action that tightens the capital markets.
  B. Leading market indicators decrease, causing consumers to expect lower inflation levels.
  C. A firm announces that it has won a major product-liability lawsuit.
  D. The growth in the U.S. economy is expected to slow from 2. 7% last year to 1.5% this year.
  A. The U.S. Federal Reserve takes action that tightens the capital markets.

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  Explanation

  If the capital markets tighten, the SML will shift upward in a parallel manner, resulting in a higher required return. If the capital markets loosen, the SML will shift downward in a parallel fashion, resulting in a decrease in expected return. All other choices result in a downward shift in the SML. After the lawsuit is "won," investors would likely view a firm as less risky and would move down along the SML to require a lower return. If economic growth decreases or if inflation decreases, the SML will shift downward in a parallel fashion. Investment growth opportunities are determined by the economy's long-term growth rate and factor into the real risk-free rate, which is a component of required return. When the growth rate decreases, investors who supply capital require a lower rate of return.

• Question 3834:

  Which of the following statements is most correct?

  A. All of these statements are false.
  B. A break point is based on the dollar value used of a specific type of capital, and occurs at the point where the cost of that capital type increases. Thus, if a firm has $100,000 in earnings, and stockholders want $50,000 of those earnings paid as dividends, then retained earnings will have two break points.
  C. A firm facing a steep demand curve (that is, high flotation costs) for new equity would likely also face, at some point, a steeply upward sloping WACC curve.
  D. All of these statements are correct.
  E. One purpose of calculating the WACC (Weighted Average Cost of Capital) is to have a singular cost of capital measure that can be applied to evaluate all of the firm's projects, including those of greater than and lesser than average risks.
  C. A firm facing a steep demand curve (that is, high flotation costs) for new equity would likely also face, at some point, a steeply upward sloping WACC curve.

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  Explanation

  Because of high flotation costs, dollars raised by selling new stock must work harder than dollars raised by retaining earnings. Steep demand would result in a steeply upward sloping WACC curve. Note, however, that for most firms, new equity issues are rare.

• Question 3835:

  Smith Company has no retained earnings. The company uses the CAPM to calculate the cost of equity capital. The company's capital structure consists of common stock, preferred stock, and debt. Which of the following events will reduce the company's WACC?

  A. An increase in the flotation costs associated with issuing preferred stock.
  B. An increase in the flotation costs associated with issuing common equity.
  C. A reduction in the market risk premium.
  D. An increase in the company's beta.
  E. An increase in expected inflation.
  C. A reduction in the market risk premium.

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  Explanation

  If the risk premium decreases, the required return on common equity will be reduced. All of the other answers will increase the firm's WACC.

• Question 3836:

  Which of the following is/are problems with comparing firm ratios with industry ratios?

  I. The firm under consideration may not be a typical firm in the industry.

  II. The firm may be located in a homogeneous industry.

  III. The firm may be multi-product, multi-industry in nature.

  IV.

  Industry ratios are difficult to calculate.

  A. I, II, III and IV
  B. I, III and IV
  C. I, II and III
  D. I and III
  D. I and III

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  Explanation

  II is not a problem, but rather the relationship among firms in an industry with homogenous products is significant.

• Question 3837:

  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 compensation received for engaging in the paying up must be reported in writing to the manager's employer.
  C. the commission paid must be reasonable in relation to the research and execution services received.
  D. the goods or services purchased must be for "research service."
  E. at all times, the manager must seek best price and execution.
  B. the compensation received for engaging in the paying up must be reported in writing to the manager's employer.

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  Explanation

  When paying up for goods and services, the requirements to be met include:

  -

  ensuring that the goods or services purchased must be for "research service;"

  -

  the commission paid must be reasonable in relation to the research and execution services received;

  -the manager's soft-dollar practice must be disclosed, and

  - at all times, the manager must seek best price and execution. However, there is no requirement for any disclosure of compensation to the manager's employer.

• Question 3838:

  Assume the following information about a publicly traded regional bank:

  Revenue: $25,000,000 Cash flow: $6,500,000 Total Assets: $68,000,000 Total Liabilities: $53,000,000 Number of common shares outstanding: 2,000,000 Current stock price: $16. 75 per share

  Using this information, what are the price-to-sales, price-to-book, and price-to-cash flow ratios, respectively?

  A. 0.75, 2. 23, 5. 15
  B. None of these answers is correct.
  C. 1.34, 0.45, 5. 15
  D. 1.34, 2. 23, 0.19
  E. 0.75, 0.45, 5. 15
  B. None of these answers is correct.

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  Explanation

  To calculate the price-to-sales ratio, divide the market price of a common stock by its sales-per share figure. The equation for the price-to-sales ratio is as follows:

  Price-to-sales ratio = [P0 / sales per share].

  Incorporating the given information into this equation will yield the following: Price-to-sales ratio = [$16. 75 / ($25,000,000 / 2,000,000)] = 1.34 The calculation of the price-to-book ratio involves dividing the market price of a common stock by its

  net worth per share. The equation for the price-to-book ratio is as follows:

  Price-to-book ratio = [P0 / net worth per share].

  Where: net worth per share = (total assets - total liabilities) / number of common shares outstanding.

  In this example, the net-worth-per-share figure must be calculated manually. This process is illustrated as follows:

  Net worth per-share = [($68,000,000 - $53,000,000) / 2,000,000} = 7. 5

  Now that the net-worth-per-share figure has been determined, the price-to-book ratio can be calculated. This process is shown below:

  Price-to-book ratio = ($16. 75 / $7. 5) = 2. 23

  The calculation of the price-to-cash flow ratio involves dividing the market price of a common stock by the cash-flow-per-share figure. The calculation of the price-to-cash flow ratio is as follows:

  Price-to-cash flow = (P0 / cash flow per share)

  Incorporating the given information into this equation will yield the following: Price-to-cash flow = [$16. 75 / ($6,500,000 / 2,000,000)] = 5. 15385

• Question 3839:

  A portfolio manager who uses the "top down" approach to investment evaluation would most likely begin her examination with which of the following?

  A. An examination of alternative industries.
  B. None of these answers is correct.
  C. An examination of governmental and regulatory influences.
  D. An analysis of the macroeconomic environment.
  E. More than one of these answers is correct.
  F. An analysis of specific securities.
  D. An analysis of the macroeconomic environment.

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  Explanation

  The top down approach typically begins with an examination of the macroeconomic environment, then progresses to an examination of alternative economies and securities markets, then to an analysis of specific industries, and finally to the examination of specific securities. The objective of the top down approach is to first decide how to allocate investment funds among various economies and styles of securities (bonds, equities, cash, etc.), then to decide which economies and industries will prosper in the current environment. The objective of the last stage of the top down approach (i.e. the examination of individual securities and companies) is to determine which companies within the selected industries offer superior investment prospects (i.e. identify investments that are undervalued).

• Question 3840:

  The results of the regressions using 200 observation on a variable Y against X are as follows:

  Coefficient Standard error

  intercept 3. 62. 1

  slope 8.11.3

  R square = 49%

  The percentage of variance in the dependent variable not explained by the regression equals ________.

  A. 36. 4%
  B. 49%
  C. 18%
  D. 51%
  D. 51%

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  Explanation

  The R-square of the regression measures the amount of variance of the dependent variable explained by the independent variable. This is given to be 49%. Hence, the amount not explained equals 100% - 49% = 51%.