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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3931:

  According to the AIMR-PPS, performance results of a past firm or affiliation

  A. must always be linked to the historical records of the new firm to show a fair and true representation of results.
  B. none of these answers.
  C. may or may not be linked to the historical records of new firm or affiliation, it is left to the discretion of the investment manager and that information should be disclosed.
  D. must not be used to represent the historical record of a new affiliation or a new firm identity.
  D. must not be used to represent the historical record of a new affiliation or a new firm identity.

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  Explanation

  Performance results of a past firm or affiliation must not be used to represent the historical record of a new affiliation or a new firm entity. This is a requirement for presentation of results.

• Question 3932:

  A portfolio consists of a six-year annuity paying $250 a year and a perpetuity that pays $300 a year. The payments start at the end of the year. With a discount rate of 9% per year, the portfolio is worth:

  A. $5,210
  B. $3,333
  C. $4,454
  D. $4,768
  C. $4,454

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  Explanation

  The value of the perpetuity is 300/0.09 = 3,333. The annuity is worth (250/0.09)*(1-1/(1.09^6)) = 1,121 The portfolio is thus worth 1,121 + 3,333 = 4,454

• Question 3933:

  A firm has an expected dividend payout ratio of 40%, and an expected dividend growth rate of 4% per year. What is the firm's Price/Earnings ratio if the appropriate discount rate is 8% per year?

  A. 10
  B. Not able to compute with the above data.
  C. 1
  D. 100
  A. 10

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  Explanation

  Value = 0.40/(0.08-0.04) = 10.

• Question 3934:

  Which of the following AIMR Standards maintains that the financial analyst must preserve the confidentiality of information communicated to him by the client?

  A. IV (A)
  B. None of these answers
  C. II (B)
  D. III (C)
  B. None of these answers

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  Explanation

  Standard IV (B.5) - Preservation of Confidentiality states: "Members shall preserve the confidentiality of information communicated by clients, prospects, or employers concerning matters within the scope of the client-member, prospect-member, or employer-member relationship unless the member receives information concerning illegal activities on the part of the client, prospect, or employer."

• Question 3935:

  Standard III of the Standards of Professional Conduct deals with Relationships with and Responsibilities to ________.

  A. AIMR
  B. Clients and Prospects
  C. None of these answers
  D. the Employer
  D. the Employer

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  Explanation

  Standard III of the Standards of Professional Conduct deals with Relationships with and Responsibilities to the Employer.

• Question 3936:

  Assume the following information about a stock market series:

  Observed beginning value: 1677 Anticipated ending value: 1890 Expected dividends during the period: $16. 36 Required rate of return: 19.50%

  Using this information, what is the expected rate of return for this index? (Assume a one-year holding period.)

  A. 10.40%
  B. 14. 79%
  C. None of these answers is correct.
  D. 12. 14%
  E. 11.73%
  C. None of these answers is correct.

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  Explanation

  The anticipated rate of return for this stock market series is found as 13. 68%. Thus, none of these answers is correct.

  To calculate the expected rate of return for a stock market series, the following information must be known: The beginning value for the series, the anticipated ending value for the series, and the amount of any dividends and/or distributions

  during the period.

  Once this information has been determined, the expected return on a stock market index can be found by employing the following equation: {E(R) = [(EV - BV + Div) / BV]}. Where E(R) = the expected return on the stock market series, EV =

  the anticipated ending value for the series, BV = the observed beginning value for the series, and Div = the amount of any dividends paid during the period.

  In this example, all of the necessary information has been provided and the calculation of the expected return on this stock market series is found as follows: {E(R) = [$1890 - $1677 + $16. 36] / 1677} = 13. 68%.

  This is significantly less than the required rate of return. Assuming that both the ending value and dividend figure is accurate, investment in this stock market series is likely not warranted.

• Question 3937:

  The following financial data on CashCow, Inc. have been taken from its financial statements for 1996:

  a.

  Dividends paid$25,000

  b.

  Sale of land$64,000

  c.

  Inventory purchases$29,000

  d.

  Purchase of a warehouse$208,000

  e.

  Bonds issued$90,000

  f.

  Dividends received from investments$17,000

  g.

  Interest paid on bonds$2,400

  h.

  Salaries paid$107,400

  i.

  Cash collection from customers$28,400

  j.

  Loss on land sale$18,000

  k.

  Beginning cash balance$312,000

  The operating cash flow for 1998 was ________.

  A. -$101,200
  B. -$75,400
  C. -$111,400
  D. -$93,400
  D. -$93,400

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  Explanation

  Items c, f, g, h, i are operating events.

• Question 3938:

  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 goods or services purchased must be for "brokerage service."
  B. the commission paid must be reasonable in relation to the research and execution services received.
  C. none of these answers.
  D. at all times, the manager must seek best price and execution.
  E. the manager's soft-dollar practice must be disclosed.
  A. the goods or services purchased must be for "brokerage service."

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  Explanation

  The good and services purchased must be for "research service."

• Question 3939:

  ________ analysis is the estimation of future security price movements based on past movements.

  A. Transactional
  B. Historical
  C. Regression
  D. Technical
  D. Technical

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  Explanation

  As opposed to fundamental analysis, technical analysis focuses on market trends rather than fundamental data, when estimating future price changes in the market.

• Question 3940:

  If the spread between the required rate of return and the anticipated dividend growth rate were to decrease significantly and suddenly while the remaining components of the P/E ratio were to remain unchanged, which of the following would likely occur? Further, a decrease in the retention rate wouldlead to what effect on the earnings multiplier, holding both the required return and expected growth rate constant?

  A. The earnings multiplier would decrease; the earnings multiplier would decrease.
  B. The earnings multiplier would increase; the earnings multiplier would increase.
  C. The earnings multiplier would increase; the earnings multiplier would decrease.
  D. The earnings multiplier would decrease; the earnings multiplier would increase.
  E. The earnings multiplier would increase; the earnings multiplier would either increase or decrease depending on the firm's return on equity compared to its cost of capital.
  B. The earnings multiplier would increase; the earnings multiplier would increase.

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  Explanation

  Remember that the equation used to determine the appropriate earnings multiplier for a stock market series is the following:

  P/E = [D/E / (k - g)]

  Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated growth rate of dividends.

  As the spread between k and g narrows, the earnings multiplier figure will increase. Indeed, the earnings multiplier is very sensitive to changes in the spread between k and g, and this is the primary reason for the greater relative volatility of the P/E ratio versus the EPS figure for a stock market series.

  A decrease in the retention rate will lead to an increase in the earnings multiplier figure, holding everything else equal. Remember that the retention rate is simply (1 - dividend payout ratio). So said, a decline in the retention rate is analogous to an increase in the dividend payout ratio. An increase in the dividend payout ratio, holding everything else equal, will lead to an increase in the earnings multiplier figure.