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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3911:

  Which of the following is NOT a form of plagiarism as defined by AIMR code of conduct?

  A. Copying proprietary software programs without permission.
  B. Using data from a well-known statistical service without attribution.
  C. Citing specific quotations to "leading analysts," without specific reference.
  D. Using publicized research reports prepared by others without attribution.
  B. Using data from a well-known statistical service without attribution.

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  Explanation

  Standard II(C) - Prohibition against Plagiarism considers a use of factual information published by recognized financial and statistical services without attribution acceptable. All of the others are forms of plagiarism and violations of Standard II (C).

• Question 3912:

  You wish to count the number of ways in which n objects can be assigned to k different categories, with n_i members in the ith category. The counting method you should use is:

  A. The permutation rule.
  B. The binomial formula.
  C. None of these answers is correct.
  D. The multinomial formula.
  D. The multinomial formula.

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  Explanation

  The number of ways that you can arrange n objects so that there are n_1 of one kind, n_2 of another kind, and so on, up to n_k of a kth kind, is found by using the multinomial formula: n! / [(n_1)! * (n_2)! * ... * (n_k)!].

• Question 3913:

  Which of the following correctly illustrates the infinite period dividend discount model?

  A. V = D0(1 + g) / (k - g)
  B. None of these answers is correct.
  C. (1 + g) = D0 * k / D1
  D. (1 + k)(1 +g) / V = P0/(k-g)
  E. V = {[D0 / (1 + r)] + [D1 / (1 + r)(1 + r)] ...+ [Dn / (k-g)]}
  F. V = D1/k
  A. V = D0(1 + g) / (k - g)

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  Explanation

  The traditional equation for the infinite period dividend discount model is as follows: Value of common stock = D1 / (k - g) Where: D1 = the dividend at t1, k = the required rate of return, and g = the assumed growth rate of dividends.

  Remember that the dividend at t1, which is characterized as "D1" is calculated by multiplying the dividend at t0 by (1 + growth rate of dividends). This equation will produce logical results regardless of whether growth or contraction of dividends is expected in the future.

• Question 3914:

  The common stock of Anthony Steel has a beta of 1.20. The risk-free rate is 5 percent, and the market risk premium is 6 percent. This year's addition to retained earnings is $3,000,000. The company's capital budget is $4,000,000 and its target capital structure is 50 percent debt and 50 percent equity. What is the company's cost of equity financing?

  A. 12. 4%
  B. 7. 0%
  C. 11.0%
  D. 12. 2%
  E. 7. 2%
  D. 12. 2%

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  Explanation

  Anthony Steel will use retained earnings to fund the equity portion of its capital budget. We can see this because the retained earnings break point is $3,000,000/0.5 = $6,000,000, which is greater than the capital budget.

  The cost of equity from the CAPM (Capital Asset Pricing Model) is:

  k(s) = krf) + (k(m) - k(rf))b(i) = 5% + (6%)1.2 = 12. 2%.

• Question 3915:

  The earnings multiple for next year's earnings must take into account the ________ of common dividends.

  A. country risk
  B. expected growth rate
  C. required return on equity
  D. aggregate business risk
  B. expected growth rate

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  Explanation

  Assuming that the dividend payout ratio is to remain constant, growth in earnings can be related to the firm's growth. It then logically follows that a faster growing firm, with faster increase in dividends will be higher priced (i.e. high earnings multiple).

• Question 3916:

  Using the macroanalysis approach to estimating a company's earnings multiplier, the multiplier is based on:

  I. the dividend payout ratio

  II. the required rate of return

  III. the company's relationship to the industry

  IV.

  the rate of growth

  V.

  the estimated earnings per share

  VI.

  the company's relationship to the market

  A. II, III, IV
  B. III, VI
  C. I, II, IV
  D. I, II, III, IV, V
  E. III, VI
  B. III, VI

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  Explanation

  The earnings multiplier, under the microanalysis approach, is estimated based on its three components: the dividend payout ratio, the required rate of return, and the rate of growth. Under the Macroanalysis approach, it is estimated from the relationships among the firm, its industry and the market. The estimates derived from each approach are resolved to settle on one estimate.

• Question 3917:

  The mean of a normal distribution is 400 pounds. The standard deviation is 10 pounds. What is the area between 415 pounds and the mean of 400 pounds?

  A. None of these answers
  B. 0.4332
  C. 0.3413
  D. 0.1932
  E. 0.5000
  B. 0.4332

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  Explanation

  z = (x-u)/sigma. z = 415 - 400/10 = 1.5. From the z-tables, z = 1.5 is 0.4332. Since we are considering just one side of the distribution and the area from the mean, then the area between the points is 0.4332.

• Question 3918:

  The Clientele Effect theory implies that investors in the low tax brackets will prefer:

  A. none of these answers.
  B. high capital gains.
  C. high dividend payouts.
  D. low dividend payouts.
  C. high dividend payouts.

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  Explanation

  The Clientele Effect is based on the presumption that different groups of investors will prefer different dividend policies based on their tax status and their need for current versus future income requirements. Hence, investors who face high taxes on current income will tend to avoid stocks with high pay-out ratios. This lowering of demand for such stocks will tend to depress their prices and to take advantage of this; investors in low tax brackets would gravitate toward them. To this, add the fact that usually, investors in low tax brackets with sufficient capital to invest tend to be either people who are old and retired or institutions like pension funds. Both these groups have a higher need for current income but are sensitive to liquidation of capital. They therefore prefer their income from stocks to be in the form of dividends rather than from the sale of their stock holdings.

• Question 3919:

  Assume a project has normal cash flows (i.e., the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?

  A. All else equal, a project's IRR increases as the cost of capital declines.
  B. None of the answers are correct.
  C. All of the answers are correct.
  D. All else equal, a project's NPV increases as the cost of capital declines.
  E. All else equal, a project's MIRR is unaffected by changes in the cost of capital.
  D. All else equal, a project's NPV increases as the cost of capital declines.

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  Explanation

  Since the present value of each cash flow is discounted at the project's cost of capital, the NPV will increase as the cost of capital declines, and the NPV will decline as the cost of capital increases. This relationship is plotted on the net present value profile.

• Question 3920:

  Technical analysts do not expect ________ to be as abrupt as do fundamental analysts.

  A. income adjustments
  B. none of these answers
  C. return adjustments
  D. price adjustments
  D. price adjustments

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  Explanation

  Technicians do not expect the price adjustment to be as abrupt as fundamental analysts and efficient market supporters do, but expect a gradual adjustment to reflect the gradual flow of information.