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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 751:

  In practice, companies who use the direct method in presenting cash flows from operations:

  A. must also disclose cash flows from operations using the indirect method.
  B. must classify interest paid as an investing activity.
  C. must be privately held or closely held corporations.
  D. are not required to report cash flows not incurred during the ordinary course of business.
  A. must also disclose cash flows from operations using the indirect method.

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  Explanation

  The advantage of the indirect method is it reconciles differences between net income and cash flows from operating activities.

• Question 752:

  David Bateman is contemplating the purchase of a shopping center. The average annual after tax cash flow for the next ten years is expected to be $30,000. The property cost $750,000. Bateman will put down 25 percent and borrow the rest. In ten years, the property will be sold netting $350,000 after taxes. What is the approximate yield on the shopping center?

  A. 21.35.
  B. 17. 2%.
  C. 12. 3%.
  D. 14. 8%.
  B. 17. 2%.

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  Explanation

  [30000 + (350,000-187,500)/10] / [(187500 + 350000) /2]

• Question 753:

  You are analyzing a firm that has:

  If you think next year's earnings will be $4 per share, what value would you place on this stock?

  A. $22. 24
  B. $26. 67
  C. $33. 32
  D. $45. 45
  C. $33. 32

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  Explanation

  Dividend payout = 1 - earnings retention rate = 1 - .4 = .6 =+ B(-) = .06 + 1.2(.11 - .06) = .12 g = (retention rate)(ROE) = (.4)(.12) = .048 P/E = (div payout rate)/(k - g) = .6/(.12 - .048) = 8.33 Price = (E)(P/E) = (4)(8.33) = 33. 32

• Question 754:

  If the alternate hypothesis specifies a particular direction for the population parameter, it is appropriate to use:

  A. a z-statistic test.
  B. a stratified sampling test.
  C. a one-tailed test.
  D. a two tailed test.
  C. a one-tailed test.

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  Explanation

  A one-tailed test is used when the alternate hypothesis specifies a particular direction for the population parameter.

• Question 755:

  When financial statements are presented that are not in conformity with generally accepted accounting principles, an auditor may express a Qualified Opinion Disclaimer of an Opinion

  Qualified Opinion Disclaimer of an Opinion

  I. Yes No

  II. Yes Yes

  III. No Yes

  IV.

  No No

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

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  Explanation

  Departures from GAAP may result in either a qualified or an adverse opinion. The auditor must exercise judgment as to the materiality of the departure. If the departure from GAAP is not sufficiently material to require an adverse opinion, the auditor should express a qualified opinion.

• Question 756:

  The nation of Myopia is having a massive inflation problem. To stabilize prices, the Myopian Central Bank decides to acquire large numbers of Capitalian Dollars (a very stable currency) and offer to exchange five Myopian Pesos for one Capitalian Dollar on demand. How does this impact the monetary base and the effective money supply for the nation of Capitalia?

  A. both decrease
  B. no change, decrease
  C. decrease, increase
  D. no change, increase
  E. no change for either
  F. both increase
  G. increase, decrease
  B. no change, decrease

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  Explanation

  The monetary base is made up of currency and bank reserves. In this case, Myopia has taken large amounts of currency out of circulation in Capitalia, but the expatriated currency is technically still part of the monetary base. Therefore the base has not changed, but the effective money in circulation has decreased. This is one of the problems economists face in attempting to measure the real money supply.

• Question 757:

  As the director of capital budgeting for Raleigh/Durham Company, you are evaluating two mutually exclusive projects with the following net cash flows: Year Project XProject Z 0-$100-$100 150 10 240 30 330 40 410 60 Is there a crossover point in the relevant part of the NPV profile graph (the northeast, or upper right, quadrant)?

  A. Yes, at k = 13%
  B. Yes, at k = 9%
  C. No
  D. Yes, at k = 7%
  E. Yes, at k = 11%
  D. Yes, at k = 7%

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  Explanation

  Financial calculator solution:

  Project X

  Inputs: CF(0) = -100; CF(1) = 50; CF(2) = 40; CF(3) = 30; CF(4) = 10.

  Output: IRR = 14. 489%.

  Project Y

  Inputs: CF(0) = -100; CF(1) = 10; CF(2) = 30; CF(3) = 40; CF(4) = 60.

  Output: IRR = 11.79%.

  Calculate the NPVs of the projects at k = 0 discount rate.

  NPV(X,k = 0%) = -100 + 50+ 40 + 30 + 10 = 30.

  NPV(Y,k = 0%0 = -100 + 10 + 30 + 40 + 60 = 40.

  Calculate the IRR of the differential project, i.e., Project(X - Y)

  IRR(X - Y)Inputs: CF(0) = 0; CF(1) = 40; CF(2) = 10; CF(3) = -10; CF(4) = -50.

  Output: IRR = 7. 167%.

  Solely using the calculator we can determine that there is a crossover point in the relevant part of an NPV profile graph. Project X has the higher IRR. Project Y has the higher NPV at k = 0. The crossover rate is 7. 17% and occurs in the upper

  right quadrant.

• Question 758:

  The distribution of a sample of the outside diameters of PVC gas pipes approximates a symmetrical, bell-shaped distribution. The mean outside diameter of the sample is 14. 0 inches, and the standard deviation is 0.1 inches. About 68 percent of the outside diameters lie between what two amounts?

  A. 13. 9 and 14. 1 inches
  B. 13. 8 and 14. 2 inches
  C. 13. 0 and 15. 0 inches
  D. None of these answers
  E. 13. 5 and 14. 5 inches
  A. 13. 9 and 14. 1 inches

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  Explanation

  Approximately 68% of observations will lie within plus and minus one standard deviation of the mean.

• Question 759:

  Which of the following statements about stock dividends is true?

  A. Stock dividends are dividends given in the form of stock from another company.
  B. Stock dividends are more valuable than stock splits.
  C. Stock dividends are recorded as a reduction in cash.
  D. Stock dividends increase the number of shares outstanding.
  D. Stock dividends increase the number of shares outstanding.

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  Explanation

  Stock dividends increase the number of shares outstanding of the issuing company and do not reduce cash.

• Question 760:

  Modigliani and Miller (MM) argued that dividend policy is irrelevant. On the other hand, Gordon and Lintner (GL) argued that dividend policy does matter. GL's argument rests on the contention that

  A. most investors will reinvest rather than spend dividends, so it would save investors money (taxes) if corporations simply reinvested earnings rather than paid them out as dividends.
  B. k(s) = D1/P0 + g is constant for any dividend policy.
  C. none of the answers are correct.
  D. investors, because of tax differentials, value a dollar of expected capital gains more highly than a dollar of dividends.
  E. because of perceived differences in risk, investors value a dollar of dividends more highly than a dollar of expected capital gains.
  E. because of perceived differences in risk, investors value a dollar of dividends more highly than a dollar of expected capital gains.

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  Explanation

  The main conclusion of MM's irrelevance theory is that dividend policy does not affect the required rate of return on equity. Gordon-Lintner disagreed stating that k(s) decreases as the dividend payout is increased because investors are less certain of receiving the capital gains which should result from retaining earnings than they are of receiving dividends. They said that investors value expected dividends more highly than expected capital gains because the dividend yield is less risky than the growth component in the total expected return equation, k(s) = D1/Po + g. MM disagreed and theorized that k(s) is independent of dividend policy, implying that investors are indifferent between dividends and capital gains.