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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 381:

  ABC Corporation has just issued $200 million of 6. 5% $1,000 par value bonds at face value. Which of the following requirements in the indenture for these bonds would most likely be considered a negative covenant? ABC must:

  A. maintain its manufacturing equipment in good condition.
  B. make timely semiannual payments of interest and principal when due.
  C. have paid all bond coupon payments due before it can pay cash dividends.
  C. have paid all bond coupon payments due before it can pay cash dividends.

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  Explanation

• Question 382:

  The P/E ratio is not determined by

  A. the required rate of return.
  B. the expected dividend payout ratio.
  C. the expected growth rate of dividends for the stock.
  D. the financial leverage ratio.
  D. the financial leverage ratio.

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  Explanation

  Using the dividend discount model, the price of a stock is equal to D / (k - g), where D is the expected dividend, k is the required rate of return, and g is the expected growth rate of dividends for the stock. Dividing both sides of the equation by expected earnings (E) yields P/E = (D/E) / (k - g), where D/E is the expected dividend payout ratio. Thus, the P/E ratio is determined by the expected dividend payout ratio, the required rate of return, and the expected growth rate of dividends for the stock. Financial leverage does not help determine P/E ratio.

• Question 383:

  In a distribution that is right skewed:

  A. the median is larger than the mean.
  B. large negative deviations dominate large positive deviations.
  C. the mean is positive.
  D. large positive deviations dominate large negative deviations.
  D. large positive deviations dominate large negative deviations.

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  Explanation

  large positive deviations dominate large negative deviations.

• Question 384:

  Giorgio offers the person who purchases an 8 ounce bottle of Allure two free gifts, either an umbrella, a 1 ounce bottle of Midnight, a feminine shaving kit, a raincoat or a pair of rain boots. If you purchased Allure what is the probability you selected at random an umbrella and a shaving kit in that order?

  A. None of these answers
  B. 0.00
  C. 0.20
  D. 0.05
  E. 1.00
  D. 0.05

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  Explanation

  There are 5 types of gifts. The probability of choosing an umbrella first is 1/5. Then the probability of choosing a shaving kit from the remaining four gifts is 1/4. So 1/5*1/4 = 1/20 = 0.05.

• Question 385:

  Which of the following statements is most correct?

  A. All these statements are false.
  B. The degree of total leverage (DTL) is equal to the DOL plus the degree of financial leverage (DFL).
  C. Arithmetically, financial leverage and operating leverage offset one another so as to keep the degree of total leverage constant. Therefore, the formula shows that the greater the degree of financial leverage, the smaller the degree of operating leverage.
  D. All these statements are true.
  E. The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are constant and (2) that variable costs are a constant proportion of sales.
  E. The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are constant and (2) that variable costs are a constant proportion of sales.

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  Explanation

  DOL is the % change in EBIT that results from a given % change in sales, while DFL is the % change in EPS that results from a given % change in EBIT. If no debt were used, the DFL would be 1.0.

• Question 386:

  About three-quarters of mutual funds are more than

  A. 70 percent diversified.
  B. 30 percent diversified.
  C. 60 percent diversified.
  D. 90 percent diversified.
  E. 50 percent diversified.
  D. 90 percent diversified.

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  Explanation

  One of the great advantages of mutual funds is the diversification they provide. Small investors do not have the resources to acquire 100 shares of 10 or 15 different shares, but can instead receive the same diversification by purchasing a mutual fund. Typically about three-quarters of mutual funds have a correlation above 0.90 with the market, meaning that they are more than 90 percent diversified.

• Question 387:

  The buyer of a call option has the:

  A. obligation to sell the underlying asset in the future under certain conditions.
  B. right to sell the underlying asset in the future under certain conditions.
  C. obligation to buy the underlying asset in the future under certain conditions.
  D. right to buy the underlying asset in the future under certain conditions.
  D. right to buy the underlying asset in the future under certain conditions.

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  Explanation

• Question 388:

  Holding other things equal, an increase in net income will

  A. decrease the ROE.
  B. have no effect on the ROE.
  C. increase the earnings multiplier.
  D. have no effect on the earnings multiplier.
  C. increase the earnings multiplier.

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  Explanation

  An increase in net income increases the return on equity ratio (ROE), which would increase the growth rate of earnings and dividends. This, in turn, would increase the earnings multiplier.

• Question 389:

  Adding the risk-free asset to a portfolio of risky assets will:

  A. decrease portfolio standard deviation because it is uncorrelated with risky assets
  B. not affect portfolio standard deviation because it is uncorrelated with risky assets.
  C. decrease portfolio standard deviation due to its negative correlation with risky assets
  A. decrease portfolio standard deviation because it is uncorrelated with risky assets

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  Explanation

• Question 390:

  In a situation where information is costly to acquire and individuals must spend time searching for jobs, which type of unemployment will result?

  A. structural
  B. seasonal
  C. frictional
  D. cyclical
  C. frictional

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  Explanation

  Frictional unemployment is due to constant changes in the economy that prevent qualified unemployed workers from being immediately matched up with existing job opening. It results from the scarcity of information and the search activities of both employers and employees for information that will help them make better employment choices.