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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 641:

  All else equal, which of the following is/are true?

  I. The stock price increases as the dividend growth rate increases.

  II. The stock price increases as the expected rate of return increases.

  III. The stock price increases as the current dividend increases.

  IV.

  The payout ratio increases as current earnings increase.

  A. III only
  B. I, II and IV
  C. I only
  D. II and IV
  E. IV only
  F. I, III and IV
  G. I and III
  H. II only
  G. I and III

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  Explanation

  The Dividend Discount Model implies, in standard notation, that Po = D1/(k-g). This equation serves to justify the choices. It should be noted that in this question, the phrase, "all else equal" is critical. In III, for e.g., you cannot expect the stock price to rise solely because dividend increases (indeed, the priceshould fall because part of the firm is being paid out as cash). The "all else equal" stipulates that the growth rate of dividend and expected return remain constant, which is what causes the stock price to rise.

• Question 642:

  A stock paid a $5 per share dividend this year. The company's dividends are expected to grow at 5% per year, forever. What is the value of the stock if the appropriate discount rate is 8% per year?

  A. $17. 50
  B. $167. 12
  C. $175. 00
  D. Not able to compute with the above data.
  C. $175. 00

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  Explanation

  Value = $5. 25/(0.08-0.05) = $175. 00

• Question 643:

  Which of the following is/are true?

  I. There are as many values above the mode as below it.

  II. The sum of the differences between the observations in a sample and the mode of the sample equals zero.

  III. The mode is not affected by "outliers."

  IV.

  A sample has a unique mode.

  A. I only
  B. II, III and IV
  C. II only
  D. I, III and IV
  E. III only
  F. III and IV
  E. III only

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  Explanation

  A sample can have multiple modes, corresponding to all the numbers which appear with the maximum frequency. Note that the mode is not affected by outliers unless an extreme value occurs frequently. In such a case, it is likely that the observed data contain large errors and hence, it must be reexamined. (I) holds for the median not the mode i.e. there are as many values above the median as below it. (II) holds for the mean i.e. the sum of the differences between the observations in a sample and the mean of the sample equals zero.

• Question 644:

  A(n) ________ is a publicly available independent representation of the market and if used as a benchmark, should be investable.

  A. mutual fund
  B. convertible bond
  C. portfolio
  D. composite
  E. index
  E. index

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  Explanation

  The most commonly used benchmark for an investment strategy is a market index. Indexes can be mixed to represent an allocation among markets. (Note: Not all indexes are investable.)

• Question 645:

  A ________, which is between a bank and a customer (or another bank), specifies delivery at a fixed future date, of a fixed amount of one currency against dollar payment.

  A. foreign exchange contract
  B. forward contract
  C. futures contract
  D. currency arbitrage
  E. cross rate
  B. forward contract

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  Explanation

  A U.S. firm buys goods from Germany with payment of DM 500,000 due in 90 days. The current price of the DM is $0.4490, yet may rise against the dollar which increases the dollar cost of the goods. The U.S. firm can protect itself against this exchange risk by entering into a 90-day forward contract with a bank at a price of $0.4511. Thus, according to the forward contract, the bank will give the U.S. firm DM 500,000 in 90 days to pay for the goods and the U.S. firm will give the bank $225,550 million (DM 500,000 x 0.4511). If the spot rate in 90 days is less than $0.4511, the U.S. firm will experience a loss on the forward contract because it is buying marks for more than the current rate. On the other hand, if the spot rate is higher than $0.4511, the importer will implicitly profit.

• Question 646:

  Which of the following is NOT a change in accounting?

  A. Change in accounting principle
  B. Change in past accounting error
  C. Changing in accounts reporting entity
  D. Changing in accounting estimate
  B. Change in past accounting error

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  Explanation

  Correction to an accounting error is not considered a change in accounting. It is treated as a "prior period adjustment" to the beginning balance of retained earnings. All other are considered accounting changes.

• Question 647:

  What stage of venture capital investments has provided the highest mean return?

  A. later
  B. seed
  C. balance
  D. early
  E. later and balance are identical
  A. later

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  Explanation

  The later stage has provided a 17. 7% mean return from 1981-1996, followed by the early stage (16. 0%), balance stage (13. 7%), and seed stage (8.3%).

• Question 648:

  Which of the following is NOT a disclosure requirement for financial instruments?

  A. Firms must present fair valuations of financial instruments in the financial statements or accompanying notes.
  B. Firm must present reasons for not meeting any of the disclosure requirements.
  C. Firms must disclose the purposes of holding any speculative financial instruments.
  D. Firms must disclose significant assumptions used to value financial instruments.
  C. Firms must disclose the purposes of holding any speculative financial instruments.

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  Explanation

  Firms must disclose the purposes of holding any speculative financial instruments.

• Question 649:

  Performance (relating to Performance Presentation Standards) is the record of the ________.

  A. person
  B. investment manager
  C. individual
  D. child
  E. firm
  E. firm

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  Explanation

  To be in compliance with the PPS, a firm's presentation of performance must comply on a firmwide basis and must consist of 10 years of performance (or records since the date of inception if the firm is younger than 10 years).

• Question 650:

  Anderson Company has four investment opportunities with the following costs (all costs are paid at t=0) and estimated internal rates of return (IRR): Project Cost IRR A $2,000 16. 0% B $3,000 14. 5 C $5,000 11.5 D $3,000 9.5 The company has a target capital structure, which consists of 40 percent common equity, 40 percent debt, and 20 percent preferred stock. The company has $1,000 in retained earnings. The company expects its year-end dividend to be $3. 00 per share. The dividend is expected to grow at a constant rate of 5 percent a year. The company's stock price is currently $42. 75. If the company issues new common stock, the company will pay its investment bankers a 10 percent flotation cost. The company can issue corporate bonds with a yield to maturity of 10 percent. The company is in the 35 percent tax bracket. How large can the cost of preferred stock be (including flotation costs) and it still be profitable for the company to invest in all four projects?

  A. 7. 75%
  B. 12. 68%
  C. 10.46%
  D. 8.90%
  E. 11.54%
  D. 8.90%

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  Explanation

  We need to find k(ps) at the point where all 4 projects are accepted. In other words, the capital budget = $2,000 + $3,000 + $5,000 + $3,000 = $13,000. The WACC at that point is equal to IRR(D) = 9.5%.

  Step 1 Find the retained earnings break point to determine whether k(s) or k(e) is used in the WACC calculation:

  BP(RE) = $2,500.

  Since the capital budget > the retained earnings break point, k(e) is used in the WACC calculation.

  Step 2 Calculate k(e):

  k(e) = [3. 00/$42. 75(1-.10)] + 5% = 12. 80%.

  Step 3 Find k(ps):

  9.5% = 0.4(10%)(0.65) + 0.2(kps) + 0.4(12. 80%)

  9.5% = 2. 60% + 0.2(kps) + 5. 12%

  1.78% = 0.2k(ps)

  8.90% = k(ps).