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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 531:

  Permanent earnings refers to

  A. the net cash flow plus the change in market value of the firm's net assets.
  B. the amount of earnings that can be paid out as dividends without changing the value of the firm.
  C. the level of earnings that can be maintained in the future given the firm's capital investment.
  D. the amount that can be normally earned and equals the market value of the firm's assets times the firm's required rate of return.
  E. the average earnings the firm generates over a specified period.
  F. none of these answers.
  D. the amount that can be normally earned and equals the market value of the firm's assets times the firm's required rate of return.

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  Explanation

  Permanent earnings is similar to economic earnings; it is the base to which a multiple is applied to arrive at a "fair price."

• Question 532:

  You are running a year-end bonus pool for your top credit analysts. You have 10 analysts, and you wish to recognize the top 3. How many different possible outcomes are there, if all three get the same bonus? How many different outcomes are there if the top analyst gets 50% of the bonus pool, the second best analyst gets 30%, and the third best gets 20%?

  A. 720; 720.
  B. 720; 120.
  C. 120; 720.
  D. 120; 120.
  C. 120; 720.

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  Explanation

  The combination, or binomial formula, gives the number of ways that k objects can be chosen from n items, without regard to the order of choosing. The formula is n_C_k = (n choose k) = n! / [k! *(n-k)!]. In this case, we have (10 choose 3) = 10! / [3! * 7!] = (10

  * 9 * 8) / (6) = 120. In the second case, where the order chosen does matter, we need the general permutation formula, which gives the number of ways that k objects can be chosen from n items, with regard to order. The formula is n_P_k = n! / (n- k)!. Here, it is 10! / (10-3)! = 720. For permutations, we don't consider choosing analysts 3, 7, and 6 the same as choosing analysts 7, 3, and 6, so there are more combinations than under the combination formula.

• Question 533:

  Which of the following would not be included as equity in a corporate balance sheet?

  A. Common stock
  B. Preferred stock
  C. Cash
  D. Retained earnings
  C. Cash

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  Explanation

  Cash does not represent equity; equity consists of the book value of a company; i.e., assets, minus liabilities.

• Question 534:

  MNB Capital manages money for high net worth individuals located within the United States. MNB's disciplined investment approach selects a small number of domestic equities selling at significant discounts to book value. If MNB wanted to implement the capital asset pricing theory to evaluate equity investments, which of the following is least appropriate as an input to construct the market portfolio?

  A. U.S. Treasury bills.
  B. Noninvestment grade bonds.
  C. Collectible art work sold in Europe.
  A. U.S. Treasury bills.

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  Explanation

• Question 535:

  Which of the following expenses can be capitalized?

  I. Research costs incurred in developing a new medicine.

  II. Purchase of intangibles for RandD activities which have alternative future uses.

  III.

  Salaries of research personnel.

  A. II only
  B. I and II
  C. III only
  D. none of them
  A. II only

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  Explanation

  US GAAP requires that all RandD costs be expensed immediately (unless they generate tangible or intangible assets which have alternative future uses which are measurable). RandD costs include salaries for research personnel.

• Question 536:

  A recent graduate of Atlantis University has been debating whether to invest in a popular retail stock. In this research, this graduate has determined that his required rate of return is 15% per year, and that thecompany's current $0.45 per share annual dividend is expected to grow by 12. 5% annually. Additionally, the investor anticipates that he will be able to sell the common stock for $28 per share in four years. What is the value of this common stock?

  A. $18.00
  B. The answer cannot be determined from the information provided.
  C. $17. 70
  D. $31.40
  E. The DDM will produce a nonsensical answer in this case.
  F. $21.23
  C. $17. 70

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  Explanation

  The Multiple Holding Period form of the Dividend Discount Model takes the following form: {V = {[d1 / (1 + k)] + [d2 / (1 + k)^2] + ... .[dn / (1 + k)^n] + [Pn / (1 + k)^n]} Where: V = the price of the common stock at t0, d1 = the annual dividend at t1 (this is found by multiplying the annual dividend at t0 by (1 + the anticipated growth rate), d2 = the annual dividend at t2 (this is found by multiplying the dividend at t1 by (1 + the anticipated growth rate), k = the required rate of return, n = period "n", and Pn = the sale price of the common stock at time "n".

  In this example, time "n" is the fourth year, as this is the end horizon for the investor's holding period. Had the investor in this example forecasted selling the shares at the end of the 10th year, then "n" would be the tenth year.

  Now that the formality of expressing the equation for this form of the DDM has been carried through, we can move toward a calculation of the value of this common stock. In this example, all of the necessary information has been provided,

  and the calculation of the value of this retail stock is as follows:

  {V = [( $0.45* 1.125) / (1 + 0.15)^1] + [($0.50625* 1.125) / (1 + 0.15)^2] + [($0.56953 * 1.125) / (1 + 0.15)^3] + [($0.640723 * 1.125) / (1 + 0.15)^4] + [ $28/ (1 + 0.15)^4]}

  which becomes

  {V = [$0.440217 + $0.430647 + $0.421285 + $0.412127 + $16. 00909] = $17. 71

• Question 537:

  A selected group of employees of Unique Buying Services is to be surveyed with respect to a new pension plan. In depth interviews are to be conducted with each employee selected in the sample. The employees are classified as follows.

  Classification Event Number of Employees Supervisors A 120 Maintenance B 50 Production C 1,460 Management D 302 Secretarial E 68

  What is the probability that the first person selected is either in maintenance OR in secretarial?

  A. 0.001
  B. 0.015
  C. 0.200
  D. None of these answers
  E. 0.059
  E. 0.059

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  Explanation

  There are 2000 employees of which 50 are from maintenance and 68 in secretarial. Therefore (50 + 68)/2000 = 0.059.

• Question 538:

  Which of the following lend support to supply-side economics?

  I. High marginal tax rates discourage additional work effort and reduce productivity.

  II. High tax rates increase the costs of supplier resources, leading to inflation.

  III. High tax rates affect adversely the efficient channeling of capital.

  IV.

  High marginal tax rates skew the demand preferences of consumers geared toward non-productive activities.

  A. I, III and IV
  B. I and III
  C. I and IV
  D. I, II, III and IV
  C. I and IV

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  Explanation

  Marginal tax rates are central to the effects postulated by Supply-side economists. According to this theory, an increase in marginal tax rates decreases the incentive to work. People to shift away from productive work and toward more leisure. Non-productive activities explicitly directed toward avoiding taxes increase and projects are selected at least partly due to their tax benefits and not necessarily due to their intrinsic merits. This leads to inefficient channeling of capital resources.

• Question 539:

  When valuing inventories using the lower-of-cost-or market (LCM), which of the following is/are true?

  I. The inventory value cannot exceed the net realizable value.

  II. If the inventory is written down from cost, the value of the inventory cannot fall below the net realizable value.

  III. Inventories can only be written back up to the original cost.

  IV.

  Write-downs are charged directly to retained earnings account.

  A. I and III
  B. I, II and III
  C. II only
  D. II and III
  A. I and III

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  Explanation

  US GAAP requires that inventory be valued at the lower of cost or market value. This means that if the inventory value falls below the cost (FIFO, LIFO, average cost, etc.) for reasons which include price changes, obsolescence, damage or theft, the loss in value must be recognized immediately. Specifically, the inventory must be "written-down" in value and the loss recognized on the income statement. In the application of this principle, "market value" is defined as current replacement cost, except that this value cannot exceed the net realizable value (NRV) or fall below NRV minus the normal profit margin.

• Question 540:

  Which of the following would increase GDP?

  A. buying a 10-year-old house
  B. giving $100 to a charity
  C. buying a new automobile made in Indiana by a Japanese owned firm
  D. buying hamburger buns by McDonald's
  C. buying a new automobile made in Indiana by a Japanese owned firm

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  Explanation

  Since GDP is the total market value of all final goods and services produced domestically during a specific period, the purchase of any good that was produced within the U.S. will positively contribute to the calculation of GDP. Despite the fact

  that the transaction profits a foreign company, the good was produced within the U.S. and therefore is counted in GDP.

  The hamburger buns do not contribute to GDP because they are an intermediate good. The house is a re-sold item, which would have been counted in GDP when it was produced, therefore is not recounted when sold.