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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 801:

  Standard IV (B.5), Preservation of Confidentiality specifically states that one may not enter into ________ that may prevent a party from cooperating with the Professional Conduct Program (PCP) in its investigation of the member's alleged violations of the Code and Standards.

  A. settlement agreements
  B. confidential conversations
  C. priority dealings
  D. business relationships
  A. settlement agreements

  ---

  Explanation

  Under Standard IV (B.5), members are prohibited from executing settlement agreements that may prevent a customer or other party from providing information, documents, or testimony or otherwise cooperating with the PCP in its investigation.

• Question 802:

  A high ratio of specialists' short sales to total short sales would be viewed

  A. bearishly by technical analysts.
  B. as unimportant by technical analysts.
  C. bullishly by technical analysts.
  D. as a signal of an approaching trough by technical analysts.
  A. bearishly by technical analysts.

  ---

  Explanation

  Technical analysts trying to follow the "smart money" sometimes use the proportion of specialists' short sales to total short sales as a market indicator. If the ratio is high, specialists are seen as trying to profit from upcoming market declines. If the ratio is low, specialists are seen as trying to minimize their participation in short sales in expectation of a rising market.

• Question 803:

  The following financial data on CashCow, Inc. have been taken from its financial statements for 1996:

  a.

  Dividends paid$25,000

  b.

  Sale of land$64,000

  c.

  Inventory purchases$29,000

  d.

  Purchase of a warehouse$208,000

  e.

  Bonds issued$90,000

  f.

  Dividends received from investments$17,000

  g.

  Interest paid on bonds$2,400

  h.

  Salaries paid$107,400

  i.

  Cash collection from customers$28,400

  j.

  Loss on land sale$18,000

  k.

  Beginning cash balance$312,000

  In the above question, the financing cash flow is ________.

  A. $79,600
  B. $90,000
  C. $82,000
  D. $65,000
  D. $65,000

  ---

  Explanation

  Items a and e are the financing cash flows.

• Question 804:

  Calculate the cost of debt for the following firm:

  Borrowing Rate 10%

  Marginal Tax Rate 40%

  Project IRR 12. 5%

  Owner's Equity 15%

  A. 1.5%
  B. 6%
  C. 60%
  D. 27. 5%
  E. 10%
  B. 6%

  ---

  Explanation

  The cost of debt is simply the rate of borrowing less the tax savings. Due to the fact that interest expense is tax deductible, the cost of debt in this case is 10%(1 - .4) = 10%(.6) = 6%.

• Question 805:

  The R-square in a univariate regression measures:

  A. the significance of the regression.
  B. the variance of the error term.
  C. the amount of variance in the dependent variable caused by the variance in the independent variable.
  D. the correlation between the dependent and the independent variables.
  C. the amount of variance in the dependent variable caused by the variance in the independent variable.

  ---

  Explanation

  It should be noted that in a univariate regression, the square root of R-square equals the correlation coefficient. The significance of a univariate or a multivariate regression is measured by the F-statistic.

• Question 806:

  The risk premium

  A. causes differences in the required rate of return among alternate types of investments.
  B. causes differences in required rates of return among alternate types of investments and among investments of the same type.
  C. can be less than zero.
  D. causes differences in the required rate of return among investments of the same type.
  B. causes differences in required rates of return among alternate types of investments and among investments of the same type.

  ---

  Explanation

  Every investment has its own risk premium, which may change over time. The required rate of return on any security is equal to the risk-free rate of return plus the risk premium on that security. Because the lowest possible required rate of return on any investment is the risk-free rate of return, the risk premium cannot be less than zero.

• Question 807:

  Consider the following preferred stock:

  Price per share: $70.10 Semiannual dividend: $3. 75 per share Required rate of return: 12% per year

  Is the preferred stock realistically overvalued, undervalued, or correctly valued? Further, should this preferred stock be valued as a perpetuity or a finite series of cash flows? (Assume a long-term holding period).

  A. Correctly valued; perpetuity
  B. Undervalued; perpetuity
  C. Overvalued; finite series of cash flows
  D. Undervalued; finite series of cash flows
  E. Correctly valued; finite series of cash flows
  F. Overvalued; perpetuity
  F. Overvalued; perpetuity

  ---

  Explanation

  The preferred stock profiled in this example is trading above its theoretical value, which is found to be $62. 50. Assuming that this value is accurate, then the stock appears to be overvalued in the marketplace.

  To determine the value of a preferred stock, use the following equation: {P0 = [d1 / k]}

  Where: P0 = the price of the preferred stock at time 0, d1 = the annual dividend at t = 1, k = the required rate of return.

  In this example, the dividend is provided as a semiannual figure, which must be doubled to show the annual dividend. After this adjustment has been made, the value of the preferred stock can be found as follows.

  {P0 = [$7. 50 / 0.12] = $62. 50.

  Preferred stock is commonly valued as a perpetuity because there is no finite conclusion to the projected series of cash flows for a preferred stock. Unlike a bond, whose cash flows are characterized by a finite lifespan (i.e. the cash flows of a

  bond cease at maturity), the cash flows (dividends) produced by a preferred stock could theoretically last forever.

• Question 808:

  Which of the following methods of estimating the cost of common equity for a firm treats risk explicitly?

  A. Composite method.
  B. Bond-yield-plus-risk-premium method.
  C. CAPM and Bond-yield-plus-risk-premium methods.
  D. DCF (Discounted Cash Flow) method and CAPM (Capital Asset Pricing Model) methods.
  E. CAPM method.
  C. CAPM and Bond-yield-plus-risk-premium methods.

  ---

  Explanation

  In the CAPM approach, the stock's beta coefficient must be estimated, which is used as an index of the stock's risk. In the bond-yield-plus-risk-premium method the risk premium is judgmentally added to the interest rate on the firm's own long- term debt.

• Question 809:

  Under what conditions is Standard II (B)- Professional Misconduct violated?

  I. The member is convicted of a misdemeanor.

  II. The member regularly engages in unprofessional but legal behavior.

  III. The member engages in dishonest activities that do not result in criminal conviction.

  IV.

  The member is convicted of a felony.

  A. II, III and IV.
  B. I, II and IV.
  C. I, II, III and IV.
  D. IV only.
  A. II, III and IV.

  ---

  Explanation

  This question pertains to Standard II (B) - Professional Misconduct. A misdemeanor conviction is only considered grounds for a violation of II (B) if it occurs repeatedly, or involves "moral turpitude" (lying, cheating, stealing, or other dishonest conduct). Unprofessional and dishonest behavior or a felony conviction are violations of Standard II (B).

• Question 810:

  All possible samples of size n are selected from a population and the mean of each sample is determined. What is the mean of the sample mean?

  A. Cannot be estimated in advance
  B. None of these answers
  C. Exactly the same as the population mean
  D. Larger than the population mean
  E. Smaller than the population mean
  C. Exactly the same as the population mean

  ---

  Explanation

  If we selected all possible samples from the population, then the sample mean will be equal to the population mean. Only when we cannot select all possible samples will be a difference.