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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 401:

  Gerard Rouleau is studying for the Level 2 CFA examination. His friend, Sonia Fennell, is studying for Level 1. One weekday morning they are sitting at the local Cafe drinking espresso when she asks him for help with the section on margin trading. Rouleau creates the following scenario: Assume Fennell purchases 1,000 shares of Xpressoh Inc. for $35 per share. The initial margin requirement is 50 percent and the maintenance margin is 25 percent One year later, she sells the stock for $42 per share. Rouleau asks Fennell to calculate the one-year return under two cases: first, assuming an all-cash transaction,and second, assuming she buys on margin. She is to ignore transaction and borrowing costs. The earnings retention rate is 100%. Which of the following choices is closest to the correct answer? The return on an all cash transaction is:

  A. 20.00%, and the return on the margin transaction is 80.00%.
  B. 20.00%, and the return on the margin transaction is 40.00%.
  C. 40.00%, and the return on the margin transaction is 80.00%.
  D. 20.00%, and the return on the margin transaction is -40.00%.
  B. 20.00%, and the return on the margin transaction is 40.00%.

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  Explanation

  One quick (and less than intensive) way to calculate the answer to this on the examination (and is it very important to save time on the examination) is to first calculate the return if all cash, then calculate the margin leverage factor and then

  finally, multiply the leverage factor times the all cash return to obtain the margin return.

  Calculations:

  Step 1: Calculate All Cash Return:

  Cash Return % = [(Ending Value / Beginning Equity Position) ?1] * 100

  = [(($42 * 1,000) / ($35 * 1,000)) ?1] * 100 = 20%

  Step 2: Calculate Leverage Factor:

  Leverage Factor = 1 / Initial Margin % = 1 / 0.50 = 2. 00

  Step 3: Calculate Margin Return:

  Margin Transaction Return = All cash return * Leverage Factor = 20% * 2. 00 = 40%

  Note: You can verify the margin return as follows:

  Margin Return % = [((Ending Value - Loan Payoff) / Beginning Equity Position) ?1] * 100

  = [(([$42 * 1,000] ?[$35 * 1,000 * 0.50]) / ($35 * 0.50 * 1,000)) ?1] * 100 = 40%

• Question 402:

  Which of the following statements is most correct?

  A. Stock splits reduce the number of shares outstanding.
  B. A key advantage of the residual dividend policy is that it usually results in a stable dividend policy, which is attractive to investors.
  C. A reduction in the capital gains rate should work to discourage corporations from repurchasing their shares.
  D. The bird-in-hand theory of dividends suggests that firms that increase their dividend payout should expect to realize a higher share price and a lower cost of equity capital.
  D. The bird-in-hand theory of dividends suggests that firms that increase their dividend payout should expect to realize a higher share price and a lower cost of equity capital.

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  Explanation

  The main conclusion of MM's irrelevance theory is that dividend policy does not affect the required rate of return on equity. Gordon-Lintner disagreed stating that k(s) decreases as the dividend payout is increased because investors are less certain of receiving the capital gains which should result from retaining earnings than they are of receiving dividends. They said that investors value expected dividends more highly than expected capital gains because the dividend yield is less risky than the growth component in the total expected return equation, k(s) = D1/Po + g. MM disagreed and theorized that k(s) is independent of dividend policy, implying that investors are indifferent between dividends and capital gains. MM called the Gordon-Lintner's study the bird-in-the- hand fallacy, because MM thought the riskiness of the firm's cash flows to investors in the long run is determined by the riskiness of the operating cash flows, not by dividend policy.

• Question 403:

  The financial analyst may ________.

  A. not accept gifts from issuers of securities under any circumstances
  B. accept modest gifts
  C. accept any gift, as long as it is disclosed
  D. none of these answers
  B. accept modest gifts

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  Explanation

  According to Standard IV (A.3) - Independence and Objectivity - modest gifts that do not exceed $100 and entertainment are acceptable, but special care should be taken by member analysts and investment managers to resist lavish gifts such as tickets, favors, job referrals and so on, which may be tied in with subtle pressures for favors possibly detrimental to clients.

• Question 404:

  Ten experts rated a newly developed chocolate chip cookie on a scale of 1 to 50. Their ratings were: 34, 35, 41, 28, 26, 29, 32, 36, 38 and 40. What is the mean deviation?

  A. 12. 67
  B. 4. 12
  C. 0.75
  D. 8.00
  E. None of these answers
  B. 4. 12

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  Explanation

  The mean is 33. 9. The mean deviation is the absolute values of the deviation from the mean. (0.1 + 1.1 + 7. 1 + 5. 9 + 7. 9 + 4. 9 + 1.9 + 2. 1 + 4. 1 + 6. 1)/10 = 41.2/10 = 4. 12

• Question 405:

  KGraphix, a small, privately owned publishing company, plans to upgrade its printing process by purchasing either a high-speed color laser printer or a webpress (a high speed color printing machine). Incremental cash flow information for

  each piece of equipment is as follows:

  Assuming that the company's weighted average cost of capital (WACC) is 13 percent, which of the following statements is most correct? KGraphix should purchase the:

  A. webpress because its net present value (NPV) of $9,939 is greater than the color laser printer's NPV of $7,223.
  B. color laser printer because its Internal rate of return (IRR) is higher than that of the webpress.
  C. color laser printer because it has the highest equivalent annual annuity.
  D. webpress because it has the longest life and the highest net present value (NPV).
  C. color laser printer because it has the highest equivalent annual annuity.

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  Explanation

  Here, we have two projects with unequal lives, so we have to adjust the cash flow. We can either adjust the cash flows of the shorter-term project to match the life of the longer-term project (adjusted NPV), or we can use the equivalent annual annuity (EAA) approach. The answer given is most correct because the project with the highest EAA will have the highest adjusted NPV, and the color laser printer has the highest EAA (and adjusted NPV). (See table below.) The statement, "KGraphix should purchase the webpress because its NPV of $9,939 is greater than the color laser printer's NPV of $7,223," calculates NPV only using the given lives (or unadjusted NPV). Unadjusted NPV is not the best criterion to use for deciding between mutually exclusive projects with unequal lives. Although the color laser printer has an IRR higher than that of the webpress, IRR is also not the best criterion to use for mutually exclusive projects with unequal lives Quantitatively: (all amounts are in $ unless indicated otherwise):

  

  Notes:1Repeats color laser project beginning in year 3; year 3 cash flow equals the net initial investment cost of $40,000 and $20,000 inflow from the last year of the "first" printer. Following are examples of how to use financial calculator to solve this problem. (Note, the example is for the unadjusted NPV, IRR, and EAA of the color laser printer. Use a similar methodology to determine the NPV, IRR, and EVA for the other cash flows streams.

  

  

  Note:1Negative sign is for calculator functionality, not to signify a negative amount

• Question 406:

  Complete the following: According to The Code of Ethics, members of AIMR shall: "Act with ________, competence, dignity and in an ethical manner when dealing with the public, clients, prospects, employers, employees and fellow members."

  A. virtue
  B. none of these answers
  C. honorability
  D. integrity
  E. morality
  D. integrity

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  Explanation

  According to The Code of Ethics, members of AIMR shall: "Act with integrity, competence, dignity and in an ethical manner when dealing with the public, clients, prospects, employers, employees and fellow members."

• Question 407:

  All of the following are sources of creditor financing except:

  A. banks
  B. accounts payable.
  C. employees who receive pay in arrears.
  D. shareholders who receive no dividends.
  D. shareholders who receive no dividends.

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  Explanation

  Shareholders, whether they receive dividends or not, are not considered creditors. Creditors do have a stake in the success of a company, but they are not owners of the company.

• Question 408:

  If consumption equals 1,100 when disposable income is 1,200 and increases to 1,400 when disposable income goes to 1,600, what are the marginal propensities to consume and to save?

  A. MPC = 1/5; MPS = 4/5
  B. MPC = 2/3; MPS = 1/3
  C. MPC = 3/4; MPS = 1/4
  D. MPC = 1/3; MPS = 2/3
  C. MPC = 3/4; MPS = 1/4

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  Explanation

  Since the MPC is determined according to the ratio: MPC = additional consumption divided by additional income, the MPC here equals: 300/400 = .75. MPS = 1-MPC so MPS = .25.

• Question 409:

  Tony Horn, CFA, is evaluating two bonds. The first bond, issued by Kanon Corp., pays a 7. 5% annual coupon and is priced to yield 7. 0%. The second bond, issued by Samuel Corp., pays a 7. 0% annual coupon and is priced to yield 8.0%. Both bonds mature in ten years. If Horn can reinvest the annual coupon payments from either bond at 7. 5%, what would his return be on each bond, assuming the bond was held to maturity?

  A. Greater than 7. 0% on the Kanon bonds and less than 8.0% on the Samuel bonds.
  B. Less than 7. 0% on the Kanon bonds and less than 8.0% on the Samuel bonds.
  C. Greater than 7. 0% on the Kanon bonds and greater than 8.0% on the Samuel bonds.
  A. Greater than 7. 0% on the Kanon bonds and less than 8.0% on the Samuel bonds.

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  Explanation

• Question 410:

  Relationships with and Responsibilities to the Employer are dealt with under:

  A. Standard II
  B. Standard I
  C. Standard V
  D. Standard III
  E. None of these answers
  F. Standard IV
  D. Standard III

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  Explanation

  Relationships with and Responsibilities to the Employer are dealt with under Standard III.