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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3941:

  "Book value per share" refers to:

  A. the per share value of the company's assets less the liabilities.
  B. all of these answers.
  C. the per share value of total equity of the firm.
  D. the per share value of the common stock accounts of a firm.
  D. the per share value of the common stock accounts of a firm.

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  Explanation

  The book value represents the company's liquidation or residual value at the amounts reported on the balance sheet. As such, it represents the "balance sheet" value of the common equity. Since total equity can include senior securities like preferred equity, "the per share value of the company's assets less the liabilities" and "the per share value of total equity of the firm" are incorrect.

• Question 3942:

  Which of the following is not a theoretical basis for the allocation of expenses?

  A. Profit maximization
  B. Systematic allocation
  C. None of these answers
  D. Cause and effect
  E. Immediate recognition
  A. Profit maximization

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  Explanation

  Profit maximization means that the goal is not to report costs as expenses by hiding them on the balance sheet. It is not an acceptable basis as it goes against the purpose of generally accepted accounting methods which is to fairly present the results of operations and financial position.

• Question 3943:

  An auditor will express an adverse opinion if

  A. the firm' s ability to continue as a going concern is subject to substantial doubt.
  B. none of these answers.
  C. a qualified opinion cannot be expressed because the auditor lacks independence.
  D. a violation of GAAP is sufficiently material that a qualified opinion is not justified.
  E. a severe scope limitation has been imposed by the client.
  D. a violation of GAAP is sufficiently material that a qualified opinion is not justified.

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  Explanation

  The auditor will express a qualified opinion when the statements are fairly presented in accordance with GAAP except for the effects of the matter to which the qualification applies. When the statements as a whole are not fairly presented in conformity with GAAP, a qualified opinion will be inappropriate, and an adverse opinion must be expressed.

• Question 3944:

  There are two popular methods for estimating the earnings multiplier for an industry or a stock market series, which of the following correctly lists these two techniques?

  A. Discounted cash flow estimation, regression analysis.
  B. The direction of change and the specific estimate approach.
  C. Microanalysis and Macroanalysis.
  D. The top-down and the bottom-up approach.
  E. Scenario Analysis, Monte Carlo Simulation.
  F. More than one of these answers is correct.
  F. More than one of these answers is correct.

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  Explanation

  More than one of these answers is correct. Specifically, the "direction of change" and the "specific estimate" are methods of forecasting the earnings multiplier of a stock market series and "microanalysis" and "macroanalysis" are used to forecast the earnings multiplier for an industry.

  When estimating the earnings multiplier for an industry, there are two common methods - the "direction of change" and the "specific estimate" approaches. The direction of change approach begins with the present earnings multiplier for a stock market series and seeks to estimate both the amount and direction of any change based upon changes in the components of the P/E ratio - the required rate of return, the anticipated growth rate of dividends, and the dividend payout ratio.

  This approach is contrasted by the specific estimate approach, which involves the estimation of a specific value for the earnings multiplier based on a series of projections for values of the components of the earnings multiplier components. When using this approach, analysts commonly confine their estimates to a series of scenarios, typically a best case, worst case, and base case scenario.

  There are two common methods for estimating the earnings multiplier for an industry - macroanalysis and microanalysis. Macroanalysis involves an examination of the relationship between the earnings multiplier for an industry and the earnings multiplier for the market. Microanalysis involves an estimation of the specific variables that influence the earnings multiplier, including the required rate of return, the estimated growth rate, and the dividend payout ratio. While the top down and bottom up method are similar to Macroanalysis and Microanalysis, respectively, they do not represent the best possible answer. Specifically, the top-down and bottom up approaches are typically used to identify investment opportunities, not for the estimation of an industry earnings multiplier.

• Question 3945:

  Morgan Inc. was organized on January 2, 1997 with the following capital structure: 10% cumulative preferred stock, par value $100 and liquidation value $105; authorized, issued and outstanding 1,000shares, $100,000 Common stock, par value $25; authorized 100,000 shares; Issued and outstanding 10,000 shares, $250,000 Morgan had net income of $450,000 for its first year, but no dividends were declared. How much was Morgan's book value per preferred share at December 31, 1997?

  A. $100
  B. $145
  C. $110
  D. $115
  E. $105
  D. $115

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  Explanation

  The book value per share of cumulative preferred stock is its liquidation value plus any dividends in arrears. Thus, the book value per preferred share is the $105 liquidation value plus $10 ($100 X 10%) of dividends in arrears, or $115.

• Question 3946:

  If a restrictive fiscal policy places downward pressure on real interest rates, we would expect

  A. all of these answers are correct.
  B. inflationary pressures to increase.
  C. an increase in the dollar.
  D. an outflow of capital.
  E. an increase in the budget deficit.
  D. an outflow of capital.

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  Explanation

  Investors facing a declining real interest rate would liquidate their assets and move their capital elsewhere in search of a higher yield. The consequence would be a capital outflow from the country.

• Question 3947:

  Which of the following is not true about monetary policy?

  A. The money supply is neutral in the long-run.
  B. Monetary policy can only serve to decrease economic volatility.
  C. In the long-run, the price level is a function of production and money supply.
  D. Without interference, the money supply would remain constant.
  E. The money supply will have no impact on real income if changes in the price level are anticipated.
  D. Without interference, the money supply would remain constant.

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  Explanation

  Usually we think of the Central Bank being in control of the money supply, but several factors outside of the baker's control can impact the money supply. Most notably is the currency deposit ratio, which measures how much currency consumers actually hold. If consumers hold more physical currency, this decreases banks' ability to create more money by lending funds.

• Question 3948:

  Tapley Acquisition Inc. is considering the purchase of Target Company. The acquisition would require an initial investment of $190,000, but Tapley's after-tax net cash flows would increase by $30,000 per year and remain at this new level forever. Assume a cost of capital of 15 percent. Should Tapley buy Target?

  A. Yes, because the IRR < the cost of capital.
  B. Yes, because the NPV = $10,000.
  C. No, because NPV < 0.
  D. No, because k > IRR.
  E. Yes, because the NPV = $30,000.
  B. Yes, because the NPV = $10,000.

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  Explanation

  NPV = $30,000/0.15 - $190,000 = $200,000 - $190,000 = $10,000.

• Question 3949:

  What is the value of a preferred stock with expected annual dividends of $20, and a required rate of return of 11%?

  A. $158.59
  B. $45. 32
  C. Not enough information
  D. $181.82
  E. $20
  D. $181.82

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  Explanation

  The value of a preferred stock is the present value of its dividends, which is equal to the annual dividend divided by the required rate of return. In this question, the preferred stock is worth 20/.11 = $181.82

• Question 3950:

  If a bond has a modified duration of 7 and convexity of 100 and interest rates fall 1 percent, what will happen to the price of the bond?

  A. Fall 7. 5%.
  B. Rise 6. 5%.
  C. Rise 7. 5%.
  D. Fall 6. 5%.
  C. Rise 7. 5%.

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  Explanation

  V = -(7) (.01) + 1/2 (100) (.01)2.