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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 841:

  Which of the following best describes the primary reason for the greater volatility of the earnings multiplier of a stock market series compared to the earnings per share (EPS) for the same series? Choose the best answer.

  A. The price/earnings ratio is less insulated from accounting distortions than is the EPS figure.; i.e. it is harder to "normalize."
  B. None of these answers is correct.
  C. The EPS figure is subject to a deleveraging effect caused by changes in the capital structure.
  D. The earnings multiplier is more sensitive to changes in the spread between the required return and growth.
  E. The earnings multiplier is more sensitive to fluctuations in the equity markets than is the EPS figure; i.e. the earnings multiplier is "forward looking."
  F. The price/earnings ratio is more sensitive to increases in a companies dividends.
  D. The earnings multiplier is more sensitive to changes in the spread between the required return and growth.

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  Explanation

  The greater relative volatility of the earnings multiplier versus the EPS figure is primarily attributable to an increased sensitivity to changes in the spread between the required rate of return "k" and the anticipated growth rate "g." Remember

  that the equation used to determine the appropriate earnings multiplier for a stock market series is the following:

  P/E = [D/E / (k - g)]

  Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated growth rate of dividends.

  As you can see, changes in the spread between the required rate of return and the anticipated growth rate can have a dramatic effect on the earnings multiplier figure for a stock market series. While the earnings multiplier is sensitive to

  changes in the dividend payout ratio, volatility in this figure is not cause for the increased volatility of the earnings multiplier versus the EPS figure.

• Question 842:

  For ________ of five or fewer portfolios, the disclosure "five or fewer portfolios" may be made rather than a disclosure of the exact number of portfolios.

  A. returns
  B. investments
  C. segments
  D. composites
  D. composites

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  Explanation

  This is an exception allowed by AIMR when disclosing the list of composites.

• Question 843:

  An economy is currently operating at full employment, with an inflation rate of 6%. The Central Bank adopts an inflationary measure consistent with an inflation rate of 8% but people anticipate an inflation of 7%. Then, the unemployment in the short run will be ________ the natural rate, as predicted by the Rational Expectations Model.

  A. could be above or below.
  B. same as
  C. below
  D. above
  C. below

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  Explanation

  The short-run equilibrium is affected by the accuracy of the predictions made by decision-makers.

  Since workers under-estimate the future inflation resulting from the changed policy, they will settle for lower wages than those consistent with the actual inflation. Consequently, the Rational Expectations Phillips curve predicts that

  unemployment will decrease in the short run. With the economy currently at full employment, the unemployment rate will fall below the natural rate, temporarily expanding the real GDP beyond the potential level. Over the long run, people will

  correct their erroneous predictions and wages will rise to a level where full employment will prevail once again.

• Question 844:

  Under adaptive expectations, a shift to a more expansionary macroeconomic policy will

  A. reduce unemployment in both the short and long run.
  B. fail to systematically reduce unemployment in either the short run or long run.
  C. reduce unemployment in the short run but not in the long run.
  D. reduce unemployment in the long run but not in the short run.
  C. reduce unemployment in the short run but not in the long run.

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  Explanation

  The effects of a more expansionary macroeconomic policy under adaptive expectations are to reduce unemployment only in the short run. This is because the inflationary effects of the demand-stimulus policy will be underestimated and thus the real wage would be eroded. The consequence of this erosion is an increase in employment. However, in the long run, unemployment is unchanged since the higher rate of inflation is anticipated.

• Question 845:

  The returns on an investment are based on

  A. earnings before taxes and interest.
  B. net earnings.
  C. dividends.
  D. gross earnings.
  E. a variety of different forms.
  E. a variety of different forms.

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  Explanation

  Earnings may not reflect real returns because of accounting methods, and other reasons. Returns come in a number of different forms, including dividends, interest payments, and capital gains.

• Question 846:

  Which of the following statements is true?

  A. Recognition is concerned with recognizing a liability from a current cash.
  B. Deferral is the process of formally recording or incorporating an item in the financial statements of an entity.
  C. Realization would reduce a liability that is recorded as a result of a cash receipt by recognizing revenues.
  D. Allocation is the process of converting non-cash resources and rights into money.
  E. Accrual is the process of recognizing assets, liabilities, and components of comprehensive income.
  E. Accrual is the process of recognizing assets, liabilities, and components of comprehensive income.

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  Explanation

  Accrual is the process of recognizing assets, liabilities, and components of comprehensive income.

• Question 847:

  An analyst with Smith, Kleen and Beetchnutty Securities has been working on a determination of EPS for a fiber optics index. In his research, this analyst has determined the following:

  1. Regressing sales for the series against Nominal GDP, the sales figure for the index has been estimated at: $16. 50 per share.

  2. Analyzing capacity utilization rates, foreign competition, rates of inflation and unit labor costs, the operating profit margin for the series has been determined to be 21.00%.

  3. Creating a time series based upon inputs such as levels of capital expenditures and PPandE turnover, next year's depreciation-per-share has been determined to be: $2. 45.

  4. Creating a time series based upon levels of debt outstanding and prevailing debt yields, the interest expense for next year is determined to be: $0.45 per share.

  5. Coordinating his research with a legislative consultant, the corporate tax rate for this series has been estimated at: 36%. Using this information, what is the EPS figure for this stock market series?

  A. $3. 50
  B. $2. 81
  C. The answer cannot be determined from the information provided.
  D. $0.20
  E. None of these answers is correct.
  F. $0.36
  F. $0.36

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  Explanation

  All of the necessary information has been provided in this example. To determine the EPS for a stock market series, the following steps are necessary:

  Step 1: Estimate sales-per-share for the series:

  Step 2: Estimate operating profit margin for the series

  Step 3: Estimate the depreciation-per-share for next year

  Step 4: Estimate the interest-expense-per-share for the next year

  Step 5: Estimate next year's corporate tax rate

  Once these five steps have been completed, the calculation of EPS for a stock market series is found by the following:

  EPS = [(Sales per share * Operating profit margin) - Depreciation-per-share - Interest Expense] * (1 -Corporate Tax Rate)

  The calculation of EPS for this stock market series is shown as follows:

  EPS = [($16. 50 * 0.21) - $2. 45 - $0.45] * (1 - 0.36) = $0.3616

• Question 848:

  Which one of the following is not one of the four major determinants of real estate value?

  A. the property
  B. demand
  C. supply
  D. the property transfer process
  E. none of these answers
  E. none of these answers

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  Explanation

  Demand, supply, the property and the property transfer process all are determinants of real estate value.

• Question 849:

  A project has the following cash flows over the next 5 years: $1,000, $600, $300, $1,200 and $1,400. Assume all cash flows occur at the end of a year. The project requires an initial cash outlay of $2,900. The project's cost of capital is 8%. The NPV of the project equals ________.

  A. $1,194
  B. $1,735
  C. $3,513
  D. $613
  D. $613

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  Explanation

  The discounted cash flow at the end of year N is obtained by dividing that year's cash flow by 1.08N, since the project's cost of capital is 8%. Using this, the discounted cash flows are:

  $926, $514, $238, $882 and $953.

  The present value of all the future cash flows = $(926 + 514 + 238 + 882 + 953) = $3,513. The NPV is then equal to $(3,513 - 2,900) = $613.

• Question 850:

  Assume you deposit $300 now into an account that had nothing in it previously, make an additional deposit of $400 in 1 year, and a final deposit of $200 in 4 years. How much is in your account in 6 years, if the account earns interest at 7% per year, compounded annually?

  A. $418.29
  B. $1,431.88
  C. $1,120.04
  D. $925. 51
  E. $1,240.22
  E. $1,240.22

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  Explanation

  Solve this question by working several compound interest problems, moving each dollar amount over to year 5. On the BAII Plus, press 6 N, 7 I/Y, 300 PV, 0 PMT, CPT FV, which yields $450.22. Then press STO 1, 5 N, 400 PV, CPT FV, which yields $561.02. Then press + RCL 1 = STO 1. Then press 2 N, 200 PV, CPT FV, which yields $228.98. Then press + RCL 1 = to see the answer. On the HP12C, press 6 n, 7 i, 300 PV, 0 PMT, FV. Then press STO 1, 5 n, 400 PV, FV. Then press RCL 1 + STO 1. Then press 2 n, 200 PV, FV. Then press RCL 1 + to see the answer. Note that the answer will be displayed as a negative number. Also note that the value of "N" for each dollar amount is based on the distance from year 6.