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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 651:

  Standard III (B) deals with ________.

  A. Use of Professional Designation
  B. Fundamental Responsibilities
  C. Professional Misconduct
  D. Disclosure of Conflicts to Employer
  E. None of these answers
  F. Duty to Employer
  G. Obligation to Inform Employer of Code and Standards
  H. Plagiarism
  F. Duty to Employer

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  Explanation

  Standard I deals with Fundamental Responsibilities. Standard II (A) deals with Use of Professional Designation. Standard II (B) deals with Professional Misconduct. Standard II (C) deals with Plagiarism. Standard III (A) deals with the Obligation to Inform Employer of Codes and Standards. Standard III (B) deals with the Duty to Employer. Standard III (C) deals with Disclosure of Conflicts to Employer.

• Question 652:

  One way for a company to increase its book value per share is to ________.

  A. issue long-term debt
  B. increase dividend payout ratio
  C. buy back shares at market prices below their book value
  D. retire long-term debt
  C. buy back shares at market prices below their book value

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  Explanation

  This will of course decrease the shares outstanding, but the $ value at a lower rate, thus increasing the book value per share.

• Question 653:

  A junior analyst with Smith, Kleen and Beetchnutty is performing an analysis of Microscam Incorporated. Assume the following information:

  g = 20% per year k = 21% per year EPS = $3. 10 D0 = $0.68

  Using this information, what is the P/E ratio for Microscam shares?

  A. None of these answers is correct.
  B. 24. 32
  C. 26. 32
  D. 15. 82
  E. 18.78
  F. The answer cannot be calculated from the information provided.
  C. 26. 32

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  Explanation

  By dividing each side of the infinite period dividend discount equation by the EPS figure, it is possible to determine the P/E ratio. This is illustrated as follows:

  P/E = (D1 / EPS)/(k-g)

  Where: D1 = the dividend at t1, EPS = the earnings per share calculation for t1, k = the required rate of return, and g = the expected growth rate.

  Manipulating the infinite period dividend discount model to solve for the PE is a rather intuitive process. Consider the fact that an investment's value is truly nothing more than the present value of all future returns. So said, dividing both sides of the infinite period dividend discount model equation should yield the appropriate multiple, or "earnings multiplier." This is the price-to-earnings ratio.

  In this example, we are provided all of the necessary information. However, the dividend at t1 must be calculated manually by multiplying D0 by (1 + growth rate). This will yield a figure of $0.816 for D1. Now that D1 has been determined, we can solve for the P/E. Imputing all the given information into the equation provided above will yield the following:

  P/E = ($0.816 / $3. 10) / (21% - 20%) = 26. 32

• Question 654:

  True or false. Firms with higher proportions of fixed costs will have an EBIT figure that is more sensitive to changes in sales, all else equal. Additionally, companies that have low Degree of Financial Leverage figures will have more aggressive depreciation and amortization schedules.

  A. False, true
  B. The answer cannot completely be determined from the information provided.
  C. True, false
  D. True, true
  E. False, false
  B. The answer cannot completely be determined from the information provided.

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  Explanation

  A somewhat tricky question as the answer cannot be fully determined from the information provided. While it is true that firms whose cost structure is weighted heavily toward fixed costs, i.e. have high relative DOL figures, will be more sensitive to changes in sales, the second question cannot be answered from the information provided. The Degree of Financial Leverage is defined as the percentage change in EPS that results from a given percentage change in EBIT. For purposes of general discussion, and the Level 1 CFA exam, the DFL calculation does not have an explicit bearing on the depreciation and amortization schedules used by companies. Had the second question asked "...companies that have low Degree of Financial Leverage figures will have EPS figures which are LESS sensitive to changes in EBIT," then both answers would be true.

• Question 655:

  Open-end funds A. have shares that trade on secondary exchanges.

  B. never charge redemption fees for share redemptions.

  C. sometimes charge sales fees for share sales.

  D. never charge sales fees for share sales.

  Correct Answer. C
  C

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  Explanation

  Open-end funds (also known as mutual funds) continue to sell and repurchase shares at their NAVs after their initial public offerings. Some funds (load funds) charge a sales fee for share sales that is typically 7. 5 to 8% of the NAV. Load funds generally do not charge a redemption fee, but some noload funds do charge a small one of about half a percent of NAV.

• Question 656:

  The following data are available for a firm for a given year:

  Net Sales 21,896 Sales and marketing expenses 4,346 Administrative expenses 2,143 COGS 10,084 Depreciation 967 Interest expense 573 Tax rate 35% Dividends paid 3,445 Preferred Dividends 897 Average total equity 37,432 Average common equity 26,782 Average total liabilities 18,583

  The firm's gross profit margin equals ________.

  A. 0.45
  B. 0.39
  C. 0.24
  D. 0.54
  D. 0.54

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  Explanation

  Gross Profit = 21,896 - 10,084 = 11,812 and

  Gross Profit margin = 11,812/21,896 = 0.54 = 54%.

• Question 657:

  What is the effective date for compliance with the AIMR-Performance Presentation Standards for non-U.S. and/or non-Canadian investments and taxable portfolios?

  A. January 1, 1994
  B. January 1, 1993
  C. January 1, 1992
  D. January 1, 1995
  A. January 1, 1994

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  Explanation

  From January 1, 1994, going forward, all of the firm's actual discretionary fee-paying portfolios invested in non-U.S. and/or non-Canadian investments ("international portfolios") and taxable portfolios (both North American and international) must be presented in composites that adhere to the Standards.

• Question 658:

  How many monthly deposits of $50, beginning next month, will you need to make into an account that pays 6% per year, compounded monthly, before you will have $20,000?

  A. 110.59
  B. 201.49
  C. 400.00
  D. 220.27
  E. 287. 71
  D. 220.27

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  Explanation

  On the BAII Plus, press 6 divide 12 = I/Y, 0 PV, 50 PMT, 20000 +/- FV, CPT N. On the HP12C, press 6 ENTER 12 divide i, 0 PV, 50 PMT, 20000 CHS FV, n. Note that the HP12C will display 221 as the answer. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 659:

  Regarding Standard III (A), which of the following is true?

  A. If the employer has publicly acknowledged, in writing, adoption of AIMR's Code and Standards as part of its firm policies, then the member need not give formal written notification.
  B. A member does not have to notify the supervisor, if the supervisor is a CFA charterholder.
  C. Notification must be given to the chief operating officer (or equivalent), orally or in writing.
  D. Notification must always be given, orally or in writing.
  E. None of these answers is true.
  A. If the employer has publicly acknowledged, in writing, adoption of AIMR's Code and Standards as part of its firm policies, then the member need not give formal written notification.

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  Explanation

  "Members shall inform their employer, in writing, through their direct supervisor, that they are obligated to comply with the Codes and Standards and are subject to disciplinary sanctions for violations thereof." However, if the employer has publicly acknowledged, in writing, adoption of AIMR's Code and Standards as part of its firm policies, then the member need not give formal written notification. Subordinate employees cannot assume that their supervisors are aware of the obligations, even if the supervisors are AIMR members.

• Question 660:

  You have invested in a stock that has a dividend growth rate of 4%. It is expected to pay a dividend of $4 per share next year. You expect to sell the stock after 3 years, for a capital gain of about $6 per share. If your required rate of return is 8%, what price would you be ready to pay for the stock?

  A. $75. 04
  B. $18.98
  C. $14. 18
  D. $15. 47
  A. $75. 04

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  Explanation

  Be careful about the fact that $6 represents the capital gain on the stock, not the selling price. If you buy the stock for a price, P, then the problem has in effect told you that the cash flows from the stock are expected to be: $4 next year, $4 *

  1.04 = $4. 16 in year 2 and (P + $6 + $4 * 1.04^2) = $(P + 10.33) in year 3. The present value of these cash flows at a discount rate of 8% per year is equal to P and this equals P = 4/1.08 + 4. 16/1.08^2 + (P + 10.33)/1.08^3 = P/1.08^3 + 15. 47. Solving for P gives P = 15. 47/(1 - 1/1.08^3) = $75. 04