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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 591:

  The Basic EPS represents which of the following?

  I. The net income divided by number of shares outstanding.

  II. The amount of net income available for distribution to common stock holders, per share.

  III. The net income after preferred dividends, expressed per common share.

  IV.

  Net income after preferred dividends divided by total equity.

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

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  Explanation

  For a simple capital structure, Basic EPS = (Net Income - Preferred dividends)/weighted # of common shares = The amount of net income available for distribution to common stock holders, per share. Net income after preferred dividends divided by total equity is not true since total equity includes preferred equity whereas the denominator of Basic EPS consists only of common shares.

• Question 592:

  The results of the regressions using 200 observation on a variable Y against X are as follows:

  Coefficient Standard error intercept 3. 62. 1 slope-8.11.3 R square = 49%

  The correlation coefficient between X and Y is ________.

  A. -0.49
  B. -0.70
  C. + 0.70
  D. -8.10
  B. -0.70

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  Explanation

  In a univariate regression, the correlation coefficient between the dependent and the independent variables equals the square root of R-square. However, you should also be careful about the sign, which is not given by the R-square. Rather, you have to look at the sign of the slope coefficient. In this case, the slope coefficient is negative, implying that the dependent and the independent variables are negatively correlated and the correlation coefficient equals -sqrt(0.49) = -0.7.

• Question 593:

  All of the following statements are true except for:

  A. When inventory balances decrease, cash flows increase.
  B. When short-term debt increases, cash flows increase.
  C. When accounts receivable balances increase, cash flows increase.
  D. When accounts payable balances increase, cash flows increase.
  C. When accounts receivable balances increase, cash flows increase.

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  Explanation

  As accounts receivable balances increase, there is less income received as cash, therefore cash balances on the statement of cash flows will decrease.

• Question 594:

  Given the information below, during which quarters does real income decline? Nominal GDP GDP Deflator Q 0 (base) 981100 Q 1 993101 Q 2 1,001106 Q 3 1,042111 Q 4 1,040107

  A. all four quarters
  B. none of these answers is correct
  C. 2,3
  D. 4 only
  E. 2,3,and 4
  F. not enough information given
  C. 2,3

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  Explanation

  Real income is measure by real GDP. The first step in this problem is to calculate real GDP in each period by multiplying nominal GDP by the base GDP deflator and then dividing by the current GDP deflator. The result is as follows: Q1 983 Q2 944 Q3 939 Q4 972 Therefore real income declines in the second and third quarters.

• Question 595:

  Which of the following was not a guideline put forth by George Doriot?

  A. All of these were Doriot's guidelines.
  B. Be realistic.
  C. Treat the companies like you own children.
  D. Run the business because the entrepreneur does not have the skills.
  E. Don't pull the plug too soon.
  D. Run the business because the entrepreneur does not have the skills.

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  Explanation

  George Doriot had guidelines for venture capitalists, which were:

  1. Don't try to run the business. The entrepreneur knows best.

  2. Treat the portfolio companies like your own children. Kick them every now and then if they need it, but be fair.

  3. Be a help. Be there when needed. Be an ear, a sounding board, an alter ego, and a crying towel.

  Do what is necessary to allow the portfolio company the opportunity to achieve the potential you originally thought you saw was there. Don't pull the plug too soon.

  4. Be realistic. Don't get swept away. It is very easy to listen to an entrepreneur and start getting fired up. Entrepreneurs are persuasive people.

• Question 596:

  Which of the following transactions will impact a company's balance sheet?

  A. The payment of principal on a long-term loan
  B. The sale of new common stock
  C. Net income earned by a company
  D. All of these answers
  E. The purchase of equipment for cash
  D. All of these answers

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  Explanation

  All of these answers are correct. Net income earned by a company and the sale of common stock will affect the equity of a company; the purchase of equipment for cash will affect two assets accounts (cash and long-term assets); the payment of principal of a long-term loan will affect the liabilities of a company.

• Question 597:

  A firm has purchased a building with a useful life of 7 years. It cost $35,000 and its salvage value is estimated at $5,000. If the firm uses double declining method, what's the depreciation expense recognized in Year 2?

  A. $9,125
  B. $7,143
  C. $10,000
  D. $6,857
  B. $7,143

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  Explanation

  In Double Declining method, depreciation = (2/n)*book value. In Year 1, depreciation = (2/7)*35,000 = 10,000. Hence, in Year 2, depreciation = (2/7)*(35,000-10,000) = $7,143.

• Question 598:

  Fred Fleming is considering working as a security analyst for Sector Investments. In the past, the firm has preferred to employ a top-down investment approach to analyzing potential investments. However, Fred prefers to use a bottom-up approach. Which of the following statements regarding the two analytical approaches is most accurate?

  A. Fundamental analysts only employ the bottom-up approach to security selection.
  B. Analysts using the top-down approach begin with forecasts of economic growth, interest rates, and inflation.
  C. The bottom-up approach emphasizes industry analysis for investment selection.
  B. Analysts using the top-down approach begin with forecasts of economic growth, interest rates, and inflation.

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  Explanation

• Question 599:

  Which of the following statements regarding the coefficient of correlation is true?

  A. It ranges from -1.0 to +1.0 inclusive
  B. A value of 0.00 indicates two variables are not related
  C. None of these answers
  D. All of these answers
  E. It measures the strength of the relationship between two variables
  D. All of these answers

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  Explanation

  All of these answers are properties of the coefficient of correlation. Make sure you know the formula for the coefficient of correlation.

• Question 600:

  In the calculation of WACC, which of the following should be ignored?

  A. none of these answers.
  B. long-term debt.
  C. current liabilities.
  D. preferred equity.
  C. current liabilities.

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  Explanation

  Short-term debt is not a part of the capital structure. The capital budgeting process allocates resources to long-term asset investments and as such is financed by liabilities/capital of similar maturity. Hence, short-term/current liabilities do not enter into WACC calculations.