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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3921:

  Which economic model supports the theory that budget deficits cause inflation?

  A. The supply-side model
  B. The crowding-out model
  C. None of these models support the theory
  D. The new classical model
  E. The Keynesian model
  B. The crowding-out model

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  Explanation

  The crowding out model indicates that, when the supply of money is constant, budget deficits will simply lead to higher real interest rates and a fall in net exports, which will crowd out private spending and thereby dampen the stimulus effect of the deficit.

• Question 3922:

  Managed investment companies are appealing alternatives to individual investing because:

  A. few individual investors outperform the aggregate market averages
  B. many investors are not well informed
  C. the risk-return ratio is higher in mutual funds
  D. they offer a risk-free rate of return
  A. few individual investors outperform the aggregate market averages

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  Explanation

  Efficient market studies have indicated that few investors outperform the aggregate market averages. This makes Managed investment companies a good alternative to direct investment because most of these companies offer a wide range of investment possibilities with a range of risk and return characteristics.

• Question 3923:

  Calculate the book value per share of Quality, Inc.'s common stock, given the following information. Par value of common stock, $2. 5 per share; total assets, $19,100,000; retained earnings, $7,375,000; total liabilities, $6,975,000; number of common shares outstanding, 1,250,000; number of preferred sharesoutstanding, 15,000 at $100 par value. Market value of common stock, $24. 25. Market value of preferred stock, $106. 50.

  A. $8.50
  B. $15. 28
  C. $3. 80
  D. $9.38
  E. None of these answers
  A. $8.50

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  Explanation

  The book value of the firm's common stock is $8.50 which is calculated as follows: total assets of $19,100,000, minus total liabilities of $6,975,000, minus, preferred stock outstanding of $1,500,000 (15,000 X $100), divided by the number of common shares outstanding of 1,250,000.

• Question 3924:

  A project has the following cash flows over the next 5 years: $1,000, $600, $300, $1,200 and $1,400. Assume all cash flows occur at the end of a year. The project requires an initial cash outlay of $2,900. The project's cost of capital is 8%. The discounted payback period for the project equals ________.

  A. 4. 11 years
  B. 3. 84 years
  C. 4. 81 years
  D. 4. 36 years
  D. 4. 36 years

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  Explanation

  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 1.08^N, since the project's cost of capital is 8%. Using this, the discounted cash flows are: $926, $514, $238, $882 and $953. Recovery occurs in the 5th year. At the beginning of the 5th year, the outstanding balance equals 2,900-926-514-238-882 = $340. Therefore, the discounted payback period = 4 + 340/953 = 4. 36 years.

• Question 3925:

  Antun Blasevic manages a fixed-income mutual fund which holds a variety of high-yield corporate bonds. His largest position is in Garjun Technologies, which currently trades to yield 8.75%, while the equivalent maturity U.S. Treasury yields only 5. 25%. Which of the following is the most accurate description of the yield spread between Garjun Technologies and U.S. Treasuries?

  A. The yield ratio is 1.67.
  B. The absolute yield spread is 67%.
  C. The relative yield spread is 350 basis points.
  A. The yield ratio is 1.67.

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  Explanation

• Question 3926:

  The stated purposes of Standard IV (B) (8), Disclosure of Referral Fees, are to:

  I. Help the customer or client evaluate the full cost of the services.

  II. Help the customer or client evaluate any possible partiality.

  III.

  Help the customer or client evaluate potential conflicts of interest as a result of the participation of immediate family in transactions.

  A. I only.
  B. II only.
  C. III only.
  D. I and II only.
  E. II and III only.
  F. I and III only.
  G. I, II and III.
  D. I and II only.

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  Explanation

  This question relates to Standard IV (B.8), Disclosure of Referral Fees. Statements I and II give the two primary reasons listed in the Standards of Practice Handbook for disclosing referral fees to clients. The purpose given in Statement III is not a primary consideration.

• Question 3927:

  The P/E ratio of a stock is 12. 3. Its current earnings are $12. 1 per share and a growth rate of 3. 9%. The current price of the stock is:

  A. $159.22
  B. $148.83
  C. $143. 24
  D. $154. 60
  D. $154. 60

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  Explanation

  It is important to remember that the P/E ratio is the ratio of the current stock price and next year's expected earnings. Therefore, current stock price = 12. 3 * 12. 1 * 1.039 = $154. 6

• Question 3928:

  An operating cycle is:

  A. the time frame from when a company purchases goods and or services to the point at which the company generates a receivable.
  B. the amount of time that a company allots to any individual product line.
  C. always one full fiscal year.
  D. the circle of time from the commitment of cash for purchases until the collection of receivables resulting from the sale of goods or services.
  D. the circle of time from the commitment of cash for purchases until the collection of receivables resulting from the sale of goods or services.

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  Explanation

  An operating cycle begins and ends with cash. It goes through the full cycle of buying inventory, converting the inventory, generating a receivable and finally turning the receivable into cash.

• Question 3929:

  The coefficient of determination measures:

  A. The percentage change in the dependent variable caused by a 1% change in the independent variable.
  B. The degree of linear association between the dependent and the independent variables.
  C. the slope of the regression line.
  D. The amount of variance of the dependent variable explained by the independent variable.
  D. The amount of variance of the dependent variable explained by the independent variable.

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  Explanation

  The coefficient of determination, also known as the R-square of the regression, measures the amount of variance of the dependent variable explained by the independent variable.

• Question 3930:

  A firm has entered into a long-term purchase obligation. This will allow the firm to obtain raw materials for operations at a known price over the next 6 years. This obligation must be reflected on the balance sheet as:

  A. a current liability until the first purchase occurs.
  B. a footnote disclosure.
  C. none of these answers.
  D. a long-term liability.
  B. a footnote disclosure.

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  Explanation

  It is important to recognize that liabilities arise and are recognized on the balance-sheet only if the firm has consumed at least a part of the services or goods under the contract. Until then, a liability is not admitted since there is no corresponding asset or equity that has been generated (a similar principle holds for the recognition of assets). However, due to the bonding nature of the contract, it must be disclosed in footnotes along with the relevant details so that analysts can figure in the impact of all such agreements while evaluating the future health of the firm.