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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 31:

  An analyst develops the following information to value a common stock.

  The analyst estimates the required rate of return and uses a DDM to value the shares. The value per share is closest to:

  A. $14. 39
  B. $21.28
  C. $31.39
  A. $14. 39

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  Explanation

• Question 32:

  The increase in OTC trading relative to NYSE trading over time

  A. is a sign of growing government regulation of the NYSE.
  B. is a sign of the increased influence of institutional investors.
  C. is a sign of the increased influence of individual investors.
  D. demonstrates the decreasing level of speculative activity.
  C. is a sign of the increased influence of individual investors.

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  Explanation

  Irrespective of the level of speculative activity in the market, there has been a trend toward relatively high volume on the OTC compared with the NYSE. This is partly an indication of the growing importance of individual investors, who are more prone to invest in the OTC market, and of the growing number of firms listed on the OTC relative to the NYSE.

• Question 33:

  Assume a project has normal cash flows (that is, 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. All else equal, a project's NPV decreases as the cost of capital declines.
  C. All else equal, a project's NPV increases as the cost of capital declines.
  D. All else equal, a project's MIRR is unaffected by changes in the cost of capital.
  E. None of the answers are correct.
  C. All else equal, a project's NPV increases as the cost of capital declines.

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  Explanation

  Since the cost of capital is in the denominator of the NPV formula, the lower the cost of capital the higher the NPV. The more positive the NPV, the more cash the project is generating to service its debt and to provide the required return to shareholders.

• Question 34:

  All of the following would be considered financing activities except for:

  A. dividends payable.
  B. notes payable to bank.
  C. current portion of long-term debt.
  D. loans receivable (ex. from officers).
  D. loans receivable (ex. from officers).

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  Explanation

  Investing activities include lending funds and collecting the principal on these loans.

• Question 35:

  Which of the following persons does AIMR hold most accountable for fiduciary duties owed to clients?

  A. Investment Advisors
  B. Brokers
  C. None of these answers
  D. Dealers
  C. None of these answers

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  Explanation

  AIMR's Code and Standards do not make distinctions among brokers, dealers and investment advisors when it comes to fiduciary duties toward customers. All members must comply with the conduct required of them by the Code and Standards or applicable law, whichever is higher.

• Question 36:

  Jones company earned $100,000 of pre-tax income in 1998, had $50,000 of pre-tax income in 1997, pays a 40% tax rate and has a dividend payout of 50%. What is the dividend amount declared by Jones Company in 1998?

  A. $45,000
  B. $40,000
  C. $30,000
  D. $50,000
  C. $30,000

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  Explanation

  1998 Pre-tax income was $100,000 in 1998. The pre-tax income from the prior year has no relevance to the question. If the company pays a 40% tax rate, they are left with net income of $60,000 for the year. If the dividend payout rate is 50% , the company will declare $30,000 of dividends for 1998.

• Question 37:

  Parts of the standards that are ________ must be observed.

  A. recommended
  B. suggested
  C. mandatory
  D. restraining
  E. inhibiting
  C. mandatory

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  Explanation

  Some aspects of the Performance Presentation Standards are mandatory and must be observed, while other aspects are recommended.

• Question 38:

  What is the area under the normal curve for z > 1.79?

  A. None of these answers
  B. 0.4633
  C. 0.0401
  D. 0.9599
  E. 0.0367
  E. 0.0367

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  Explanation

  From the z-tables, z = 1.79 is 0.4633. So 1 - 0.4633*2 = 0.0734. Since it is on each side of the curve, 0.0734/2 = 0.0367.

• Question 39:

  Which of the following may be used as mechanisms to motivate managers to act in the best interest of the stockholders?

  I. Managerial compensation

  II. Direct stockholder intervention

  III. Threat of firing

  IV.

  Threat of takeover

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

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  Explanation

  Managerial compensation may be designed to not only attract and retain the best managerial talent for a firm, but also to align the management's action with the interest of the shareholders. Direct intervention is another mechanism that may be used to motivate management into acting in the owner's best interest. This in practice is executed with a wide degree of success. The threat of firing may also be used as well as the threat of hostile takeovers. The threat of a hostile takeover is strongest when a company is under performing and/or its stock is undervalued.

• Question 40:

  A firm issued 2 million warrants with an exercise price of 102 on June 15, 1996. The maximum price of the stock in 1996 was 129, the average price was 110. The stock closed out the year at 99. How many additional shares must be used in the computation of Diluted EPS as a result of these warrants?

  A. 111,782
  B. 145,454
  C. 78,788
  D. zero
  C. 78,788

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  Explanation

  The conversion assumptions for options and warrants are as follows:

  1. They are assumed to be exercised at the beginning of the period or at the time of issuance, whichever is later.

  2. They enter into the Diluted EPS calculations only if the average stock price during the period exceeds the exercise price. With the Treasury stock method, the total shares repurchased using exercise proceeds = 2*102/110 = 1,854,546. Thus, additional shares issued = 2 million - 1,854,546 = 145,454. These are outstanding for 6. 5 months. Therefore, additional weighted shares = 145,454*6. 5/12 = 78,788.