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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 741:

  Tiarera has just landed a big account for her fund and is in a joyous mood. To celebrate, she decides to go out to a bar with some of her friends and share some drinks. Tiarera, however, has a weak constitution and cannot handle alcohol very well. In fact, many times in the past, she has gotten into drunken altercations at bars. Tonight turns out to be no different; Tiarera and her friends are arrested for disorderly conduct and convicted for misdemeanor. Tiarera has

  A. has violated Standard II (B) - Professional Misconduct - because of a pattern of misconduct.
  B. not violated any AIMR standard since the arrest was for a misdemeanor, an offense not serious enough to trigger sanctions on the first occurrence.
  C. has violated Standard II (B) - Professional Misconduct - because she has been involved in a misdemeanor.
  D. not violated any AIMR standard since the arrest took place due to activities not related to her work.
  A. has violated Standard II (B) - Professional Misconduct - because of a pattern of misconduct.

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  Explanation

  A single instance of misdemeanor is generally not serious enough to constitute a violation of Standard II (B). However, Tiarera has shown a pattern of professional misconduct that reflects poorly on her firm and her profession, thus violating the AIMR standard.

• Question 742:

  All else equal, an increase in the expected inflation rate ________ the value of a stock.

  A. does not affect
  B. decreases
  C. increases
  D. can be all of these answers
  B. decreases

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  Explanation

  When expected inflation rises, the expected rate of return demanded by the investors increases. All else equal, this can happen only if the price of the stock drops.

• Question 743:

  A normally distributed variable has a mean of 45. If 95% of the observations on the variable fall between 30 and 60, the standard deviation of the variable is approximately ________.

  A. 7. 50
  B. 30.3
  C. insufficient information
  D. 15. 0
  A. 7. 50

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  Explanation

  95% of the observations on a normally distributed variable lie within about two standard deviations of the mean. The standard deviation is then (45-30)/2 = 7. 5.

• Question 744:

  Javier Corporation is considering a project with the following cash flows: Time Cash Flow 0-$13,000 112,000 28,000 37,000 4-1,500 The firm's cost of capital is 11 percent. What is the project's modified internal rate of return (MIRR)?

  A. 21.68%
  B. 23. 78%
  C. 24. 90%
  D. 25. 93%
  E. 16. 82%
  C. 24. 90%

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  Explanation

  First, find PV of all cash outflows:

  PV of CF(0) is -$13,000. PV of CF(4) is -1,500 discounted at 11% for 4 periods or -$988.10. Thus, the PV of all cash outflows is -$13,988.10.

  Second, find the FV at t = 4 of all cash inflows:

  The sum of these cash inflows is the project's terminal value. FV of CF(1) at t = 4 is found by entering N = 3, I = 11, PV = -12,000, and PMT = 0. Then solve for FV = $16,411.57. Similarly, the FVs at t = 4 of CF(2) and CF(3) are found to be

  $9,856. 80 and $7,770.00, respectively. Thus, the projects TV = $16,411.57 + $9,856. 80 + $7,770.00 = $34,038.37.

  To find the MIRR, enter N = 4, PV = -13,988.10, PMT = 0, and FV = 34,038.37, which yields I/YR = MIRR = 24. 90%.

• Question 745:

  Which of the following groups are least likely to be creditors of a company?

  A. suppliers
  B. investors
  C. banks
  D. customers
  D. customers

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  Explanation

  The customers that buy on credit owe the company; they are not creditors of the company unless the company owes them.

• Question 746:

  Which of the following is not a violation of Standard II (C)?

  A. Using a chart that was prepared by another analyst in a presentation, without acknowledgment.
  B. All of these answers are violations.
  C. Giving an oral report and citing specific quotations, attributable to "leading analysts," without specific reference.
  D. Use of statistical information provided by Standard and Poor's, without acknowledgment.
  E. Use of a small part of an analyst's work who is employed in a completely different (non-competitive) industry, without acknowledgment.
  D. Use of statistical information provided by Standard and Poor's, without acknowledgment.

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  Explanation

  Using excerpts from articles or reports prepared by others, either verbatim, or with only a slight change, without acknowledgment; citing specific quotations, attributable to "leading analysts," without specific reference; using charts or graphs without stating their sources; and copying proprietary computerized spreadsheets or algorithms without seeking the authorization of their creators - all of these practices are violations of Standard II (C). Only globally recognized sources of factual material such as that provided by Standard and Poor's, or Moody's Investors Service, can be used without acknowledgment, since such information is already in the public realm.

• Question 747:

  Douglas Morin is discussing market efficiency with some college students who are visiting his firm. Morin states that market efficiency would increase if the cost of trading decreases, if the cost of information decreases, and if arbitrageurs had less capital. Morin is least likely to be correct in his opinion about:

  A. the cost of trading
  B. the cost of information
  C. arbitrageurs
  C. arbitrageurs

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  Explanation

• Question 748:

  Which of the following firm's earnings per share (EPS) figure would be least sensitive to a percentage change in Earnings Before Interest and Taxes (EBIT)? Firm A EBIT: $6,800,000 Interest Paid: $505,000 Total Operating Expenses: $80,000,000 Fixed Operating Expenses: $50,250,000 Firm B EBIT: $20,000,000 Interest Paid: $600,000 Total Operating Expenses: $40,000,000 Fixed Operating Expenses: $30,250,000 Firm C EBIT: $50,500,000 Interest Paid: $3,500,000 Total Operating Expenses: $66,000,000 Fixed Operating Expenses: $30,750,000 Firm D EBIT: $49,700,000 Interest Paid: $7,750,000 Total Operating Expenses: $90,000,000 Fixed Operating Expenses: $75,000,000 Firm E EBIT: $43,000,000 Interest Paid: $7,000,000 Total Operating Expenses: $85,000,000 Fixed Operating Expenses: $60,500,000

  A. The answer cannot be determined from the information provided.
  B. Firm B
  C. Firm A
  D. Firm D
  E. Firm C
  F. Firm E
  B. Firm B

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  Explanation

  This question is asking you to calculate the Degree of Financial Leverage for each company. The Degree of Financial Leverage (DFL) measures the percentage change in EPS that results from a given percentage change in EBIT. Financial Leverage is the second component of total leverage, along with Operating Leverage. The equation used to calculate the Degree of Financial Leverage is as follows: {DFL = [EBIT/(EBIT - Interest Paid)]}. As companies incorporate more debt in their capital structure, their EPS figure will become more sensitive to fluctuations occurring from interest payments, and this is evidenced by an increase in the Degree of Financial Leverage. In this example, Firm B has the lowest DFL with a figure of 1.031. In light of this information, it can be concluded that firm B has an EPS figure which is the least sensitive to a given change in EBIT. When calculating the DFL figure, remember that the answer can never be less than one, and can never be negative. In a situation where the company under examination has zero debt, and no preferred stock dividends (and therefore no interest expense for purposes of the DFL equation), the DFL would be equal to one. It is important note to remember is that in calculating the Degree of Financial Leverage, dividend payments to preferred stockholders should be included in the interest expense figure. Operating expenses are not factored into the DFL calculation, rather are used in the determination of Operating Leverage.

• Question 749:

  Which of the following statements about institutional investors is TRUE?

  A. Banks have high liquidity needs and short time horizons.
  B. Pension funds and endowment funds have low liquidity needs and long time horizons, carry tax exempt status, and both are regulated at the state and federal level.
  C. In general, Life Insurance companies have lower liquidity needs and shorter time horizons than Property/Casualty Insurance Companies.
  D. The liquidity and time horizon parameters for defined contribution pension plans are determined by employee age and turnover rate.
  A. Banks have high liquidity needs and short time horizons.

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  Explanation

  Banks have high liquidity needs and short time horizons due to the need to maintain a positive spread and the need to pay out deposits and fund loans. Pension funds are regulated at the Federal level under ERISA and endowments are regulated at the state level. Life Insurance companies have longer time horizons than Property/Casualty Insurance Companies. (Lower liquidity needs usually translate to longer time horizons.) The liquidity and time horizon parameters for defined benefit pension plans are determined by employee age and turnover rate. These are plans where the employer promises the employee a specific income stream upon retirement.

• Question 750:

  Goodwill should:

  A. be expensed in the period in which it is purchased from another company or organization.
  B. not be amortized as it will be a benefit to the company over its entire life. Companies are assumed to have an indefinite life.
  C. written off over a 40 year period even if the superior earning power justifying its existence disappears.
  D. be amortized to income over a period not exceeding 40 years.
  D. be amortized to income over a period not exceeding 40 years.

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  Explanation

  Goodwill can be amortized over a maximum of 40 years. However, goodwill should be amortized over a number of periods equal to its ability to deliver superior earning power unless that period is over 40 years.