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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 71:

  Which of the following answers is false in reference to confidence levels and/or tests of significance? Choose the best answer.

  A. All else equal, the confidence interval for a test with a 5% significance level is larger than the confidence interval for a test with a 1% significance level.
  B. The Greek letter alpha is used to denote the probability of a Type I error.
  C. The significance level used in hypothesis testing is typically 0.10, 0.05, or 0.01. D. In most hypothesis testing, the power of a test is equal to (1 - the significance level).
  E. The confidence level can be found by (1 - alpha).
  F. More than one of these answers is false.
  A. All else equal, the confidence interval for a test with a 5% significance level is larger than the confidence interval for a test with a 1% significance level.

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  Explanation

  The confidence interval for a test with a 5% level of significance is smaller than the confidence interval for a 1% significance level. Remember that the significance level is typically set equal to the probability of a Type I error, which is defined as the act of incorrectly rejecting the null hypothesis. In hypothesis testing, the significance level is denoted by the Greek letter alpha. As the level of confidence increases, then the confidence interval will increase. This will be mirrored by a decrease in the alpha coefficient (i.e. the probability of a Type I error) for the hypothesis test. The remaining answers are correct.

• Question 72:

  Given the following information, what would the expected industry rate of return equal? Dividend payout= 30%

  Net earnings estimate= $12. 62/share Multiple estimate= 19 Current earnings index= 225. 50

  A. 8.5%
  B. 9.0%
  C. 8.0%
  D. 7. 5%
  E. 10.0%
  C. 8.0%

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  Explanation

  Expected industry return = (Index estimate - Current index + Dividend) / Current index = (239.78 - 225. 50 + $3. 79) / 225. 50 = 8.0%

  Index estimate = $12. 62 x 19 = 239.78 Dividend = .30 x $12. 62 = $3. 79

• Question 73:

  Clay Industries, a large industrial firm, is examining the capital structure of one of its Lebanese subsidiaries. The management of Clay Industries has identified the following information: EBIT $1,000,000 EPS $1.88 Interest paid $121,590 Sales $1,940,000 Cost of debt 6. 60% Given this information, what is the Degree of Financial Leverage for this operating division?

  A. 1.940
  B. 1.138
  C. 1.551
  D. The Degree of Financial Leverage cannot be calculated from the information provided.
  E. 1.197
  F. 1.063
  B. 1.138

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  Explanation

  To calculate the DFL, the financial analyst needs to determine the EBIT and interest paid for a predetermined time period. To calculate the Degree of Financial Leverage, the following equation is used: {EBIT/[EBIT - interest paid]}. Incorporating the given information into this equation yields the following: {EBIT $1,000,000 / [EBIT $1,000,000 - interest paid $121,590]}= 1.138. The Degree of Financial Leverage measures the percentage change in EPS which results from a given percentage change in EBIT. Remember that any preferred stock dividends must be incorporated into the DFL calculation, and that the DFL can never be less than one.

• Question 74:

  Alabama Pulp Company (APC) can control its environmental pollution using either "Project Old Tech" or "Project New Tech." Both will do the job, but the actual costs involved with Project New Tech, which uses unproved, new state-of-the-art technology, could be much higher than the expected cost levels. The cash outflows associated with Project Old Tech, which uses standard proven technology, are less risky--they are about as uncertain as the cash flows associated with an average project. APC's cost of capital for average risk projects is normally set at 12 percent, and the company adds 3 percent for high risk projects but subtracts 3 percent for low risk projects. The two projects in question meet the criteriafor high and average risk, but the financial manager is concerned about applying the normal rule to such cost-only projects. You must decide which project to recommend, and you should recommend the one with the lower PV of costs. What is the PV of costs of the better project? Cash Outflows Years:01234 Project New Tech1,500315315315315 Project Old Tech600600600600600

  A. 2,399
  B. 2,521
  C. 2,457
  D. 2,422
  E. 2,543
  D. 2,422

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  Explanation

  Recognize that (1) risky outflows must be discounted at lower rates, and (2) since Project New Tech is risky, it must be discounted at a rate of 12% - 3% = 9%. Project Old Tech must be discounted at 12%.

  Tabular solution:

  PV(New Tech) = -$1,500 - $315(PVIFA9%,4) = -$1,500 - $315(3. 2397) = -$2,520.51. PV(Old Tech) = -$600 - $600(PVIFA12%,4) = -$600 - $600(3. 0373) = -$2,422. 38. PV(Old Tech) is a smaller outflow than NPV(New Tech), thus, Project Old

  Tech is the better project.

• Question 75:

  Which of the following methods of evaluating capital projects incorporate an explicit discount rate into the equation?

  A. Net Present Value, Payback Period
  B. Internal Rate of Return, Modified Internal Rate of Return
  C. Discounted Payback Period, Net Present Value, Payback Period
  D. Discounted Payback Period, Net Present Value, Modified Internal Rate of Return
  E. Discounted Payback Period, Net Present Value, Internal Rate of Return
  D. Discounted Payback Period, Net Present Value, Modified Internal Rate of Return

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  Explanation

  Of the methods for evaluating capital projects, the Net Present Value, Modified Internal Rate of Return, and Discounted Payback Period Methods incorporate an explicit discount rate into their equations. This discount rate is often referred to as the "cost of capital" for the project being examined. Remember that the Internal Rate of Return equation does not involve the incorporation of an explicit discount rate,rather solves to find that rate which equates the present value of a project's cash inflows with that of its cash outflows. Additionally, the "Payback Period" method does not involve an explicit discount rate, rather fails to incorporate any form of discounting into its calculation. The Payback Period is an overtly simplistic method, and as such, the figures produced by this method should be viewed with a degree of caution.

• Question 76:

  You are examining the return on equity ratios of the nation's publicly owned companies. You wish to calculate a typical deviation from the average ROE, but you do not have time to gather data on all the firms. What measure should you use?

  A. Population variance.
  B. Sample variance.
  C. Population standard deviation.
  D. Sample standard deviation.
  D. Sample standard deviation.

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  Explanation

  A typical deviation is going to be a standard deviation, not a variance. When using a sample, instead of the entire population, you have sample standard deviation, not population standard deviation.

• Question 77:

  If the 200-day moving average for a stock is well above its current price, then

  A. the stock price must have experienced an overall upturn. If the current price slide reverses itself, and the stock price moves above its 200-day moving average on heavy volume, technical analysts would view this as a very positive sign.
  B. the stock price must have experienced an overall downturn. If the current price slide reverses itself, and the stock price moves above its 200-day moving average on heavy volume, technical analysts would consider this to be a sign that the stock is overbought.
  C. the stock price must have experienced an overall downturn. If the 50-day moving average is also below the 200-day moving average, but then moves up above the 200-day moving average, technical analysts would consider this a sign that the market is overbought.
  D. the stock price must have experienced an overall downturn. If the 50-day moving average is also below the 200-day moving average, but then moves up above the 200-day moving average on heavy volume, technical analysts would consider this to be a bullish sign.
  D. the stock price must have experienced an overall downturn. If the 50-day moving average is also below the 200-day moving average, but then moves up above the 200-day moving average on heavy volume, technical analysts would consider this to be a bullish sign.

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  Explanation

  In order for a moving average of a stock price to be below the current price, the stock price must have experienced an overall decline. Technicians believe that the current price breaking through the moving average from below on heavy volume is a very positive sign, and may well signal the reversal of the declining trend. If the current price breaks through the moving average from above on heavy volume, this would be taken as a very negative sign. The same is true of changes in the relative positions of a longer moving average and a shorter moving average.

• Question 78:

  The primary cause of frictional unemployment is

  A. fluctuations in aggregate demand.
  B. the lack of training and marketable qualifications in job seekers.
  C. inaccurate and costly information about job opportunities.
  D. high unemployment benefits that reduce the incentive of unemployed workers to seek work.
  C. inaccurate and costly information about job opportunities.

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  Explanation

  Frictional unemployment is the result of a scarcity of information and the search activities of both employers and employees for information that will help them make better employment choices.

• Question 79:

  Level I verification requires independent attestation that the requirements of the AIMR-PPS have been met on a(n) ________ basis.

  A. international
  B. nationwide
  C. firmwide
  D. attainable
  C. firmwide

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  Explanation

  This is a requirement under Level I verification procedures.

• Question 80:

  You recently purchased a twin-engine plane after landing an ultra-lucrative job on Wall Street. The annual payments on the plane are $8,000 per year and the installment plan extends over 5 years. The payments start today. If your discount rate is 8.5% per year, how much would it have cost you to purchase the plane on an all-cash basis?

  A. $34,205
  B. $40,611
  C. $41,232
  D. $36,429
  A. $34,205

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  Explanation

  The present value of the installment payments equals 8,000 + (8,000/0.085)*(1-1/(1.085^4)) = $34,205