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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 581:

  Manufacturers were subdivided into groups by volume of sales. Those with more than $100 million in sales were classified as Class A large; those from $50 to $100 million as Class A medium size; and those between $25 and $50 million, and so on. Samples were then selected from each of these groups. What is this type of sampling called?

  A. Stratified random
  B. Simple random
  C. Convenience
  D. None of these answers
  E. Panel
  A. Stratified random

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  Explanation

  This is stratified random sampling. It is a method of selecting a random item from each section of the population. The randomness comes from the random selection from a particular section. Stratified refers to the division of the sections.

• Question 582:

  Which of the following factors determine the growth rate of dividends?

  A. Growth rate of earnings and the payout ratio
  B. Growth rate of earnings
  C. Depends on the individual firm
  D. Growth rate of earnings and cash flow
  A. Growth rate of earnings and the payout ratio

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  Explanation

  While growth rate of earnings gives a sense of future opportunities, the payout ratio determines how much reinvestment is made to capture these opportunities. The better the firm performs, the higher the chances of higher future dividends.

• Question 583:

  If the calculated NPV is negative, then which of the following must be true? The discount rate used is ________.

  A. equal to the internal rate of return
  B. too high
  C. greater than the internal rate of return
  D. too low
  E. less than the internal rate of return
  C. greater than the internal rate of return

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  Explanation

  If a project has a positive NPV, then it is generating more cash than is needed to service its debt and to provide the required return to shareholders, and this excess cash accrues solely to the firm stockholders. On the other hand is a project has a negative NPV, the required rate of return is not being met and the discount rate used must be greater.

• Question 584:

  The percentage mix of debt, preferred stock and common equity that maximizes a firm's stock price is known as:

  A. Composite Cost of Capital (CCC)
  B. Security Market Line
  C. Weighted Average Cost of Capital (WACC)
  D. Target (Optimal) Capital Structure
  E. Least Cost Structure
  F. Efficient Frontier
  D. Target (Optimal) Capital Structure

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  Explanation

  The Target (Optimal) Capital Structure is defined as the percentages of debt, preferred stock, and common equity that will maximize the firm's stock price.

• Question 585:

  If you buy an item and pay for it with 60 monthly payments of $75 that begin next month, what was the cash price today, if interest accrues at 11% per year, compounded monthly?

  A. $4,598.42
  B. $3,544. 71
  C. $2,545. 29
  D. $3,904. 12
  E. $3,449.48
  E. $3,449.48

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  Explanation

  The cash price would be the present value of the payments made using the specified interest rate. On the BAII Plus, press 60 N, 11 divide 12 = I/Y, 75 PMT, 0 FV, CPT PV. On the HP12C, press 60 n, 11 ENTER 12 divide i, 75 PMT, 0 FV, PV. Note that the answer will be shown as a negative number. Make sure the BAII Plus has the P/Y value set to 1.

• Question 586:

  The financial statements of Multiverse for 1997 showed the following:

  a.

  Dividends paid 60

  b.

  Provision for bad debt 15

  c.

  Depreciation 90

  d.

  Interest paid 35

  e.

  Proceeds from new bonds issued 225

  f.

  Bonds retired 400

  g.

  Gain on bonds retired 25

  h.

  Shares repurchased 195

  i.

  Net Income 350

  j.

  Tax rate 50%

  A. -405
  B. -430
  C. -370
  D. -380
  D. -380

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  Explanation

  Items a, e, f, g and h are financing items. However, remember that item g, gain on bonds retired, is an extraordinary item under SFAS 4 and presented after-tax. Hence, the total cash spent on retiring bonds = 400 - 25/(1-0.5) = 350.Therefore, financing cash flow = -60 + 225 - (400 - 25/0.5) - 195 = - 380.

• Question 587:

  A stock's P/E ratio is 6. 4, with an expected return of 8% and a dividend growth rate of 4%. The firm's earnings retention ratio equals ________.

  A. 42. 8%
  B. 74. 4%
  C. 25. 6%
  D. 31.7%
  B. 74. 4%

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  Explanation

  In standard notation, the Dividend Discount Model gives P/E = (dividend payout ratio)/(K - g). Therefore, dividend payout ratio = 6. 4*(8% - 4%) = 25. 6%. The earnings retention ratio equals 1 minus the dividend payout ratio. In this case, the earnings retention ratio equals 1 - 25. 6% = 74. 4%.

• Question 588:

  Gregg Goebel and Mason Erikson are studying for the Level 1 CFA examination. They have just started the section on Portfolio Management and Erikson is having difficulty with the equations for the covariance (cov1,2) and the correlation coefficient (r1,2) for two-stock portfolios. Goebel is confident with the material and creates the following quiz for Erikson. Using the information in the table below, he asks Erickson to fill in the question marks.

  Which of the following choices correctly gives the covariance for Portfolio J and the correlation coefficients for Portfolios K and L, respectively?

  A. 1.680, 0.002, 0.000.
  B. 0.011, 0.833, 0.056.
  C. 0.110, 0.224, 0.076.
  D. 0.083, 0.011, 0.417.
  B. 0.011, 0.833, 0.056.

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  Explanation

  The calculations are as follows:

  Portfolio J covariance= cov1,2= (r1,2) * ( 1) * ( 2) = 0.75 * 0.08 * 0.18 = 0.0108, or 0.011. Portfolio K correlation coefficient= (r1,2) = cov1,2/ [ ( 1) * ( 2) ] = 0.02 / (0.20 * 0.12) = 0.833

  Portfolio L correlation coefficient= (r1,2) = cov1,2/ [ ( 1) * ( 2)1/2] = 0.003 / (0.18 * 0.091/2) = 0.003 / (0.18 * 0.30) = 0.056Remember:The standard deviation is the square root of the variance. Read carefully on the exam!

• Question 589:

  Assume the following information about the common stock of a mid-sized regional bank.

  Required rate of return on equity: 13. 75% per year Expected growth rate: 10.20% per year Dividend at t0: $0.35

  Assuming that the growth rate will remain stable, what is the value of this regional bank's common stock?

  A. $13. 93
  B. The answer cannot be calculated from the information provided.
  C. $15. 23
  D. $10.86
  E. $10.02
  F. None of these answers is correct.
  D. $10.86

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  Explanation

  In this example, the growth rate of dividends is assumed to remain stable, allowing the use of the Gordon Model. The Gordon Model is also known as the "constant growth dividend discount model" and takes the following form: P0 = [D1 / (r - g)]

  Where P0 = the price of common stock X at time 0 D1 = the expected dividend at t1 r = the required rate of return on equity investments and g = the expected growth rate of dividends.

  Since the dividend at t1 is not provided, we must calculate it manually by multiplying the dividend at t0 by (1 + g). This will produce an answer of $0.3857 at t1. Now that the dividend at t1 has been determined, the given information can be put into the equation provided, leading to the following series of calculations:

  P0 = [$0.3857 / (.1375 - .1020)] = $10.86.

  When using the Gordon model, remember that the required rate of return "r" must be greater than the expected growth rate "g." Otherwise, the equation will produce a nonsensical answer.

• Question 590:

  Black Oil is an oil and gas exploration and production company. Black's management hedges its crude oil production using futures contracts. Which of the following would be the least likely method Black would use to close out the futures position?

  A. Holding the cash settled future until expiration.
  B. Physically settling according to exchange rules.
  C. Offsetting the transaction by shorting the oil futures contract on the same exchange.
  C. Offsetting the transaction by shorting the oil futures contract on the same exchange.

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  Explanation