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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 611:

  A variable, Z, is regressed against variables X and Y and the following equation is estimated: Z = -3. 0 + 1.2X - 2. 5Y + error. If X = 5 and Y = 3, the estimated value of Z is ________.

  A. -3. 0
  B. cannot be estimated since the error term is unknown
  C. -1.5
  D. -4. 5
  D. -4. 5

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  Explanation

  With the given data, Z = -3 + 1.2*5 - 2. 5*3 = -4. 5

• Question 612:

  Charles Ray, a portfolio manager with Bay Side Brokerage, is examining shares of a large money center bank. In his analysis, Mr. Ray has determined that the $1.20 per share dividend of this company isanticipated to grow at 14. 5% annually. Additionally, Charles Ray has calculated his required rate of return as 16% per year. Assuming that Charles Ray can sell his shares of this bank for $85 at the end of three years, what is the value of this common stock?

  A. $57. 96
  B. $54. 82
  C. $63. 88
  D. $92. 45
  E. The Multiple Period DDM will produce a nonsensical answer for this stock.
  A. $57. 96

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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 third 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 9th year, then "n" would be the ninth 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 = [($1.20 * 1.145) / (1 + 0.16)^1] + [($1.374 * 1.145) / (1 + 0.16)^2] + [($1.57323 * 1.145) / (1 + 0.16)^3] + [$85 / (1 + 0.16)^3]}

  which can be further reduced to the following:

  {V = [$1.184483 + $1.169166 + $1.154048 + $54. 455902] = $57. 96}

• Question 613:

  When valuing real estate, ________ should rarely be used exclusively as an approach to value.

  A. none of these answers
  B. the comparative sales approach
  C. the income approach
  D. the cost approach
  D. the cost approach

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  Explanation

  The cost approach works best with new or relatively new properties and is a good method to use as a check of the other approaches to value.

• Question 614:

  Neeson Pacino is the senior vice president in the corporate finance arm of Hindenberry Brokerage. Neeson was recently approached by Curare Creators, a pesticide manufacturer. Curare would like to offer new equity to raise capital and has provided Neeson with its current balance sheet and details about the pending projects. Neeson carefully goes over the numbers with a couple of project managersat Curare and also two of his analysts at Hindenberry. He concludes from these discussions that the numbers presented by Curare are overly optimistic. The revised numbers would seriously lower the offering price. Not relishing this prospect, Neeson decides to go ahead with the numbers as drawn up by Curare and directs the department to prepare the IPO with the offering price. Neeson has

  A. violated Standard IV (A.1) - Reasonable Basis and Representations.
  B. violated Standard IV (B.3) - Fair Dealing.
  C. violated Standard IV (B.1) - Fiduciary Duties.
  D. violated Standard II (B) - Duty to the Employer.
  A. violated Standard IV (A.1) - Reasonable Basis and Representations.

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  Explanation

  By knowingly misrepresenting the situation, Neeson has allowed the possibility that investors would end up paying more than the fair price in the seasoned equity offering. He has thus violated Standard IV (A.1) - Reasonable Basis and Representations.

• Question 615:

  Which of the following would not normally be found in the footnotes that accompany financial statements?

  A. significant legal proceedings
  B. list of officers and directors of company
  C. details of business acquisitions
  D. significant accounting principles used
  B. list of officers and directors of company

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  Explanation

• Question 616:

  The period between the trough of the business cycle and the next peak is called the

  A. cyclic phase.
  B. expansionary phase.
  C. contractionary phase.
  D. recessionary phase.
  B. expansionary phase.

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  Explanation

  After a downturn reaches bottom and economic conditions begin to improve, the economy enters the expansion phase of the cycle. Here business sales rise, GDP grows rapidly and the rate of unemployment declines. The expansion eventually blossoms into another business peak.

• Question 617:

  In general, the earnings multiplier for a stock market series is a more volatile figure than the earnings-per-share for the same series. The greater relative volatility of the earnings multiplier is mostly attributable to which of the following?

  A. The earnings multiplier is more sensitive to changes in the spread between the required return and growth.
  B. The earnings per share (EPS) figure is subject to cash flow adjustments, which "normalize" the EPS figure over time.
  C. The earnings multiplier is more sensitive to changes in the payout ratio.
  D. The earnings multiplier is subject to a tax-deleveraging effect.
  E. None of these answers is correct.
  A. The earnings multiplier is more sensitive to changes in the spread between the required return and growth.

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  Explanation

  The greater relative volatility of the earnings multiplier versus the EPS figure is primarily attributable to an increased sensitivity to changes in the spread between the required rate of return "k" and the anticipated growth rate "g." Remember

  that the equation used to determine the appropriate earnings multiplier for a stock market series is the following:

  P/E = [D/E / (k - g)]

  Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated growth rate of dividends.

  As you can see, changes in the spread between the required rate of return and the anticipated growth rate can have a dramatic effect on the earnings multiplier for a stock market series. While the earnings multiplier is sensitive to changes in

  the dividend payout ratio, volatility in this figure is not cause for the increased volatility of the earnings multiplier versus the EPS figure.

• Question 618:

  Using the Security Market Line concept in capital budgeting, which of the following is correct?

  A. If two mutually exclusive projects' expected returns are both above the SML, the project with the lower risk should be accepted.
  B. If a project's expected rate of return is greater than the expected rate of return on an average project, it should be accepted.
  C. If a project's return lies below the SML, it should be rejected if it has a beta greater than the firm's existing beta but accepted if its beta is below the firm's beta.
  D. If the expected rate of return on a given capital project lies above the SML, the project should be accepted even if its beta is above the beta of the firm's average project.
  D. If the expected rate of return on a given capital project lies above the SML, the project should be accepted even if its beta is above the beta of the firm's average project.

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  Explanation

  If the expected rate of return on a given capital project lies above the SML, the expected rate of return on the project is more than enough to compensate for its risk, and the project should be accepted. Conversely, if the project's rate of return lies below the SML, it should be rejected.

• Question 619:

  Which of the following statements is most correct?

  A. All of these statements are correct.
  B. Stockholders pay no income tax on dividends reinvested in a dividend reinvestment plan.
  C. Investors receiving stock dividends must pay taxes on the new shares at the time the stock dividends are received.
  D. None of these statements are correct.
  E. "New-stock" dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don't change the total equity of a firm.
  D. None of these statements are correct.

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  Explanation

  Stock dividends are dividends paid in the form of additional shares of stock rather than in cash. The total number of shares is increased, so earnings, dividends, and price per share all decline. In a dividend reinvestment plan, the stockholder must pay taxes on the dividend amount, even though stock and not cash has been received.

• Question 620:

  According to Porter, which is not a competitive force that determines the intensity of competition?

  A. none of these are competitive forces
  B. bargaining power of suppliers
  C. bargaining power of buyers
  D. substitute products
  E. rivalry among competitors
  F. all of these are competitive forces
  F. all of these are competitive forces

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  Explanation

  The remaining force is the threat of new entrants.