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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 771:

  Compared to the no-trade situation, when a country exports a good

  A. domestic consumers gain, domestic producers lose and the losses outweigh the gains.
  B. domestic consumers gain, domestic producers lose and the gains outweigh the losses.
  C. domestic producers gain, but domestic consumers lose an equal amount.
  D. domestic producers gain, domestic consumers lose and the gains outweigh the losses.
  D. domestic producers gain, domestic consumers lose and the gains outweigh the losses.

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  Explanation

  Domestic producers gain under export because only goods for which the international price is higher than the domestic price will be exported. Thus, the producer will receive a higher price abroad than it is receiving at home. Domestic

  consumers lose because producers will reduce their output for domestic consumption which will cause the price to rise. The gains outweigh the losses because the country will divert resources away from inefficient production to the efficient

  production of the exported goods.

  Producers will be motivated to divert these resources by higher prices abroad.

• Question 772:

  Which of the following statements about contrary-opinion and smart money technicians is INCORRECT?

  A. When margin balances in brokerages accounts increase, contrary-opinion technicians are bearish.
  B. The investment advisory ratio is at 0.65. Contrary-opinion technicians are bullish.
  C. The OTC volume is less than 87% of the NYSE volume. Investors are bearish.
  D. A narrowing of the T-bill - Eurodollar futures spread is a signal for a smart-money technician to buy.
  A. When margin balances in brokerages accounts increase, contrary-opinion technicians are bearish.

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  Explanation

  Although an increase in margin (debit) balances in brokerages accounts means investors are bullish, it is not an indicator used by contrary-opinion technicians. This would be a bullish sign to smart-money technicians. The other statements

  are correct. When the investment advisory ratio (bearish opinions/total opinions) is equal to or greater than 0.60, it means that investors are bearish, and contrary-opinion technicians are bullish. Investors are considered bullish if the OTC

  volume is greater than 112% of the NYSE volume.

  Summary of the indicators for contrary-opinion and smart money technicians:

  Contrary-opinion technicians (trade the opposite of the mass of general investor):

  Smart-money technicians (follow the professional investors):

• Question 773:

  Company D has a 50 percent debt ratio, whereas Company E has no debt financing. The two companies have the same level of sales, and the same degree of operating leverage. Which of the following statements is most correct?

  A. None of these answers are correct.
  B. If sales increase 10 percent for both companies, then Company D will have a larger percentage increase in its operating income (EBIT).
  C. All of these answers are correct.
  D. If EBIT increases 10 percent for both companies, then Company D's net income will rise by more than 10 percent, while Company E's net income will rise by less than 10 percent.
  E. If sales increase 10 percent for both companies, then Company D will have a larger percentage increase in its net income.
  E. If sales increase 10 percent for both companies, then Company D will have a larger percentage increase in its net income.

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  Explanation

  After the sales increase, the percentage increase in EBIT will be the same for both companies. Company E's net income will rise by exactly 10%.

• Question 774:

  When formulating an investment policy for a client, which of the following falls under "investor objectives?"

  A. investable funds
  B. time horizon
  C. risk tolerance
  D. proxy voting
  E. liquidity needs
  F. none of these answers
  C. risk tolerance

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  Explanation

  Risk tolerance is considered under "investor objectives." Liquidity needs, time horizon, proxy voting and investable funds are considered under "investor constraints."

• Question 775:

  A firm has a dividend growth rate of 2. 8%. It typically pays out 48% of its earnings as dividends. Recently, it paid out $2. 4 per share dividend and the required rate of return on its stock is 13%. The firm's return on equity equals ________.

  A. 5. 83%
  B. 5. 38%
  C. insufficient information
  D. 12. 19%
  B. 5. 38%

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  Explanation

  g = ROE*(1 - dividend payout ratio). Therefore, ROE = 0.028/(1 - 0.48) = 5. 38%.

• Question 776:

  A joint probability is expressed symbolically as:

  A. P(A | B).
  B. P(B | AB).
  C. P(AB).
  D. P(A or B).
  C. P(AB).

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  Explanation

  A joint probability takes the form of P(AB), the probability that a an event A and an event B will both happen.

• Question 777:

  If a stock that you are holding for one year has an estimated dividend payout of $2. 50 and an expected sale price of $43, what is the value of the stock?

  A. $22
  B. $23. 10
  C. $20.26
  D. not enough information to calculate it
  D. not enough information to calculate it

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  Explanation

  To determine the value of a stock held for one year, it is necessary to estimate the dividend to be received during the period, the expected sale price at the end of the period and its required rate of return. The required rate of return in this case is not given.

• Question 778:

  Which of the following have a clear positive relationship with operating profit margin?

  A. Inflation
  B. Unit labor costs
  C. Capacity utilization rates
  D. Foreign competition
  C. Capacity utilization rates

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  Explanation

  Higher capacity utilization rates intuitively improves operating margin because of economies of scale, though up to certain volume whereby typically there will be some diminishing returns.

• Question 779:

  Consider the following annual growth forecasts for a common stock:

  Growth in years 1-2 = 50% Growth in years 3-4 = 25% Growth after year 4 = 10%

  Assuming that the last dividend was $0.45 per share, and the required rate of return is 20% per year, what is the value of this common stock?

  A. $13. 81
  B. $8.36
  C. $19.05
  D. $11.15
  E. $7. 25
  D. $11.15

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  Explanation

  To determine the value of a common stock experiencing temporary supernormal growth, use the following equation:

  {V = {[d0 * (1 + gs)^1] / k} + {[d1 * (1 + gs)^2} + ... {dn * (1 + gs)^n} + {[dn * (1 + gs)^n * (1 + gn] / (k - g)}/ (1 + k)^n}}

  Where: V = the value of common stock at t0, d0 = the dividend at t0, d1 = the dividend at t1, dn = the dividend at tn, gs = the supernormal rate of growth, gn = the normal rate of growth, n = the time period "n", and k = the required rate of

  return.

  where

  In this example, there is a transitional growth period of two years, during which the growth rate is expected to grow at 25% annually. This period will follow the two-year supernormal growth period, and would be denoted as "g subset t" if we

  were to reproduce the equation illustrated above. The calculation of the value of this common stock is illustrated as follows:

  {V = {[$0.45 * (1.50)^1] / (1.20)} + {[$0.45 * (1.50)^2] / (1.20)^2} + {[$0.45 * (1.50)^2 * (1.25)^1] / (1.20)^3} + {[$0.45 * (1.50)^2 * (1.25)^2] / (1.20)^4} + {{[$0.45 * (1.50)^2 * (1.25)^2 * (1.10)^1]/ (0.20 - 0.10)}/ (1.20)^4}

  which can be deduced to the following:

  {V = [$0.5625 + $0.703125 + $0.732422 + $0.762939 + $8.392334] = $11.15}

• Question 780:

  A firm's capital structure has a debt-to-equity ratio of 0.8. The pretax cost of debt is 7%. The beta of the stock is 1.3 in an environment with risk-free rate of 5. 5% and an expected market return of 16%. The firm is in the 45% tax bracket. The weighted average cost of capital of the firm equals ________.

  A. 12. 35%
  B. 9.43%
  C. 6. 91%
  D. 13. 81%
  A. 12. 35%

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  Explanation

  Using CAPM, the cost of equity equals 5. 5% + 1.3*(16% - 5. 5%) = 19.15%. Since the debt interest is tax deductible, the after-tax cost of debt equals 7%*(1-0.45) = 3. 85%. Now, the D/E ratio = 0.8. Hence, (D+E)/E = 1.8, giving E/(D+E) =

  0.556. Thus, equity forms 55. 6% of the capital while debt forms 44. 4%. The WACC is then equal to 0.556*19.15% + 0.444*3. 85% = 12. 35%.