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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 551:

  Under the accrual basis of accounting, which of the following statements is true?

  I. Reported net income provides a measure of operating performance.

  II. Revenue is recognized when cash is received, and expenses are recognized when payment is made.

  III.

  Cash inflows are recognized when they are received, and cash outflows are recognized when they are made.

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

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  Explanation

• Question 552:

  You are examining the return on equity ratios of the nation's commercial airlines. You have calculated the mean ROE to be 8%, and the sum of the squared ROEs is 0.27. Assuming there are 30 commercial airlines, what is the population standard deviation of ROEs in this industry?

  A. 5. 1%.
  B. 7. 9%.
  C. 8.0%.
  D. 5. 0%.
  A. 5. 1%.

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  Explanation

  The population standard deviation is the positive square root of the population variance. The population variance is equal to the sum of the squared differences between each population member and the population mean, divided by the number of items in the population. There is, however, an equivalent alternate formula that is more often used for large amounts of calculation. It is equal to the average squared observation less the squared mean. In this case, we have the average squared observation will be 0.27 / 30 = 0.009, less the squared mean of 8%. We have 0.009 - 0.0064 = 0.0026 = 26%%. The square root of this number, 5. 1%, will be the population standard deviation.

• Question 553:

  A firm with a simple capital structure had a net income of 7,700 last year. It had 1,000 common shares outstanding and its reported EPS was 6. 6. What was the firm's payment to its preferred stock holders?

  A. 1,300
  B. 900
  C. 1,100
  D. 1,200
  C. 1,100

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  Explanation

  For a simple capital structure, EPS = (Net Income - Preferred stock dividends)/weighted # of common shares This gives 6. 6 = (7700- Preferred stock dividends)/1000. Hence, payment to preferred equity holders = 1,100.

• Question 554:

  How much would an original deposit of $900 grow to be after 10 and a half years, if the deposit earns interest at 6. 5% per year, compounded quarterly?

  A. $1,853. 97
  B. $1,254. 58
  C. $1,573. 42
  D. $1,771.19
  E. $1,837. 51
  D. $1,771.19

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  Explanation

  On the BAII Plus, press 42 N, 6. 5 divide 4 = I/Y, 900 PV, 0 PMT, then press CPT FV. On the HP12C, press 42 n, 6. 5 ENTER 4 divide i, 900 PV, 0 PMT, then press FV. Note that N = 42 quarters (10.5 x 4 =) and the answer is displayed as a negative number. Make sure that the BAII Plus has the P/Y value set to 1.

• Question 555:

  The opportunity cost of producing a good: A. generally decreases as the country produces more and more of the good.

  B. is not dependent on the marginal cost of producing the good.

  C. generally increases as the country produces more and more of the good.

  D. is usually uniform across countries.

  E. none of these answers.

  Correct Answer. C
  C

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  Explanation

  The opportunity cost of producing a good beyond some level of production will often increase. This is because of rising marginal costs as the level of output increases. Thus, the degree to which a country will specialize in the production of a good is limited.

• Question 556:

  Basic earnings per share is calculated as:

  A. [Net Income- Dividends]/Weighted Avg # of shares outstanding.
  B. [Net Income-Preferred Dividends]/Weighted Avg # of common shares outstanding.
  C. [Net Income]/[Common shares outstanding]
  D. [Net Income-Preferred Dividends]/[Weighted Avg # of common shares outstanding] - EPS impact of diluted convertibles.
  B. [Net Income-Preferred Dividends]/Weighted Avg # of common shares outstanding.

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  Explanation

  The basis EPS formula aims to derive earnings per share of common stock for the amount of the year that the common shares were outstanding. It is for this reason that preferred dividends are not included and the weighted average number of common shares outstanding are used in the denominator.

• Question 557:

  What monthly payment, beginning next month, would repay a $17,500 car loan over 48 months, assuming your loan has an interest rate of 4. 9% per year, compounded monthly?

  A. $364. 58
  B. $650.58
  C. $953. 46
  D. $402. 22
  E. $4,923. 75
  D. $402. 22

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  Explanation

  On the BAII Plus, press 48 N, 4. 9 divide 12 = I/Y, 17500 PV, 0 FV, CPT PMT. On the HP12C, press 48 n, 4. 9 ENTER 12 divide i, 17500 PV, 0 FV, PMT. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 558:

  A firm is considering the purchase of an asset whose risk is greater than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision-maker should

  A. Increase the NPV of the asset to reflect the greater risk.
  B. Ignore the risk differential if the asset to be accepted would comprise only a small fraction of the total assets of the firm.
  C. Reject the asset, since its acceptance would increase the risk of the firm.
  D. Increase the IRR of the asset to reflect the greater risk.
  E. Increase the cost of capital used to evaluate the project to reflect the higher risk of the project.
  E. Increase the cost of capital used to evaluate the project to reflect the higher risk of the project.

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  Explanation

  An increase in a project's beta will cause its stock price to decrease unless the increased beta were offset by a higher expected rate of return. Therefore, high-risk investments require higher rates of return, whereas low-risk investments require lower rates of return.

• Question 559:

  Assume you deposit $800 now into an account that had nothing in it previously, make an additional deposit of $800 in 2 years, and a final deposit of $800 in 4 years. How much is in your account in 5 years, if the account earns interest at 8% per year, compounded annually?

  A. $3,047. 23
  B. $2,708.29
  C. $4,331.88
  D. $3,120.04
  E. $2,905. 51
  A. $3,047. 23

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  Explanation

  Solve this question by working several compound interest problems, moving each dollar amount over to year 5. On the BAII Plus, press 5 N, 8 I/Y, 800 PV, 0 PMT, CPT FV, which yields $1,175. 46. Then press STO 1, 3 N, CPT FV, which yields $1,007. 77. Then press + RCL 1 = STO 1. Then press 1 N, CPT FV, which yields $864. 00. Then press + RCL 1 = to see the answer. On the HP12C, press 5 n, 8 i, 800 PV, 0 PMT, FV. Then press STO 1, 3 n, FV. Then press RCL 1 + STO 1. Then press 1 n, FV. Then press RCL 1 + to see the answer. Note that the answer will be displayed as a negative number. Also note that the value of "N" for each dollar amount is based on the distance from year 5. Make sure that the BAII Plus has the P/Y value set to 1.

• Question 560:

  An analyst with Guffman Investments has developed a stock selection model based on earnings announcements made by high P/E stocks. The model predicts that investing in companies with P/E ratios twice that of their industry average that make positive earnings announcements will generate significant excess return. If the analyst has consistently made superior risk-adjusted returns using this strategy, which form of the efficient market hypothesis has been violated?

  A. Weak form of market efficiency.
  B. Semistrong and weak forms of market efficiency.
  C. Strong, semistrong, and weak forms of market efficiency.
  B. Semistrong and weak forms of market efficiency.

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  Explanation