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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 871:

  Suppose the Fed sells $25 million worth of Treasury bonds in the open market. This action will serve to ________ the consumption of interest-rate sensitive goods like home mortgages. The U.S. dollar will ________ against the other currencies.

  A. increase; appreciate
  B. increase; depreciate
  C. decrease; appreciate
  D. decrease; depreciate
  C. decrease; appreciate

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  Explanation

  The sale of bonds implies that the Fed takes out money from the economy. This reduces the monetary base and the total money supply in the economy, causing the real interest rates to rise in the short run. This makes the opportunity cost of

  consuming interest rate sensitive goods like homes and cars more expensive, leading to a decrease in the consumption of these goods. The high real rates will attractforeign funds into the U.S., causing the demand for U.S. dollars to

  increase.

  The U.S. dollar will thus appreciate in the short run.

• Question 872:

  A portfolio manager is examining shares of Ottawa Industries to determine if the shares are fairly valued. Ottawa Industries common stock is currently trading at $70 per share on the New York Stock Exchange. In her analysis, the portfolio manager determines the value of Ottawa Industries common stock using the two-stage dividend growth rate model. Due to the release of several important new products, the Company is anticipated to grow at a rate of 16% per year for the next three years. After this supernormal growth rate period, Ottawa Industries is anticipated to return to its long-term growth rate of 12% per year. The Company recently paid an annual dividend of $0.90 per share, and investments of a similar nature have warranted a 13. 5% per year rate of return.

  Given this information, what is the value of Ottawa Industries common stock? Use the dividend discount model. Additionally, are shares of Ottawa Industries currently overvalued, undervalued, or fairly valued in the stock market?

  A. None of these answers is correct.
  B. $74. 56, undervalued
  C. $103, undervalued
  D. $98, overvalued
  E. The answer cannot completely be calculated from the information provided.
  F. $100, fairly valued
  B. $74. 56, undervalued

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  Explanation

  The multi-stage dividend discount model is a more realistic way of valuing fast-growing companies that pay dividends. With this model, it is necessary to estimate the above-average, or "supernormal," rate of growth, as well as the long-term

  rate of growth. Once these growth rates have been determined, they are used to calculate the anticipated annual dividends leading up to the "horizon point" at which the growth rate decelerates to the long-run rate of growth.

  Incorporating the given information into the two-stage dividend discount model will yield the following

  P = {[$0.90 * 1.16) / 1.135] + [($1.044 * 1.16 / 1.28823] + [($1.21104 * 1.16) / 1.46214] + [($1.40481 * 1.12) / (.135 - .12)]/1.46214}

  Which can further be developed into:

  P = {$0.91982 + $0.94008 + $0.96079 + $71.74} = $74. 56

  Assuming that the results produced by the multi-stage dividend discount model are accurate, Ottawa industries common stock appears to be undervalued.

• Question 873:

  When the Percentage of Sales method is used, the estimated bad debt expense is calculated by

  A. dividing total sales on account by the percentage
  B. subtracting the percentage of net sales on account from the balance of allowance for uncollectible accounts
  C. multiplying total sales on account times the percentage
  D. multiplying net sales on account times the percentage
  D. multiplying net sales on account times the percentage

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  Explanation

  This method bases the period adjustment on a percent of net sales on account for the period.

• Question 874:

  Where is Unearned Revenue reported in the financial statements?

  A. liability section of the balance sheet
  B. revenue section of the income statement
  C. asset section of the balance sheet
  D. operating expense section of the income statement
  A. liability section of the balance sheet

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  Explanation

  Unearned revenue represents "services owed" and is reported in the liability section of the balance sheet.

• Question 875:

  Which AIMR standard states that members must inform employers of their duty to comply with the Code and Standards and must deliver a copy to their employers?

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

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  Explanation

  Standard III (A) Obligation to Inform Employer of Code and Standards states: Members shall: "(1) Inform their employer in writing, through their direct supervisor, that they are obligated to comply with the Code and Standards and are subject to disciplinary sanctions for violations thereof, and (2) Deliver a copy of the Code and Standards to their employer if the employer does not have a copy."

• Question 876:

  How long will it take for an initial deposit of $2,500 to grow to be $4,000, if the interest rate is 5% per year, compounded annually?

  A. 32 years
  B. 9.63 years
  C. 7. 72 years
  D. 6. 93 years
  E. 14. 48 years
  B. 9.63 years

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  Explanation

  Either the $2,500 or the $4,000 must be entered as a negative number - it won't matter which. On the BAII Plus, press 5 I/Y, 2500 PV, 0 PMT, 4000 +/- FV, CPT N. On the HP12C, press 5 i, 2500 PV, 0 PMT, 4000 CHS FV, n. Note that the HP12C will indicate 10 years for the answer.

• Question 877:

  What simple annual interest rate would cause a $120 deposit to grow to $125 in 6 months?

  A. 25%
  B. 7. 89%
  C. 4. 17%
  D. 3. 14%
  E. 8.33%
  E. 8.33%

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  Explanation

  To solve this question, we have to rearrange the simple interest formula, I=PRT so that the R is by itself. Note that the I (interest) is equal to 5 (125 - 120). Note also that the time component T of the formula is 6/12. On the BAII Plus, press 5 divide 120 divide 6 x 12 = to see the answer. On the HP12C, press 5 ENTER 120 divide 6 divide 12 x to see the answer.

• Question 878:

  An increase in the dividend payout ratio, a decrease in the required rate of return, and a slight increase in the growth rate would

  A. have an unpredictable affect on the earnings multiplier.
  B. increase the earnings multiplier.
  C. decrease the earnings multiplier.
  D. slightly decrease the earnings multiplier.
  B. increase the earnings multiplier.

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  Explanation

  The earnings multiplier is equal to Dp / (k - g), where Dp is the dividend payout ratio, k is the required rate of return, and g is the growth rate. The changes specified in this question would undoubtedly increase the earnings multiplier. This estimate is an example of the direction of change approach, which begins with the current earnings multiplier and estimates the direction and extent of change for the dividend payout ratio and the variables that influence the required rate of return and the growth rate of dividends and earnings.

• Question 879:

  A firm is considering a project whose estimated cash flows have indicated a payback period of 3. 68 years. It requires an initial outlay of $1,000 and has end-of-year cash flows of $350, $270 and $225 in the first 3 years. The firm's marginal discount rate is 9%. The project's projected cash flow for year 4 equals ________.

  A. 373
  B. 514
  C. 495
  D. 228
  D. 228

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  Explanation

  The payback period is defined as the expected number of years that would be required to recover the original investment. In particular, Payback period = Years before full recovery + (unrecovered cost at the start of payback year)/(net cash flow in the payback year) In this case, the recovery occurs in the 3rd year. At the beginning of the 3rd year, the unrecovered cost equals 1,000 - 350 - 270 - 225 = 155. If total cash flow in the 4th year equals C, then payback period = 3 + 155/ C = 3. 68 years. Solving for C gives C = 228. Note that the discount rate does not figure in the calculation of payback period.

• Question 880:

  NL is a country with no securities laws. LS is a country that has securities laws that are less strict than the AIMR code of ethics while MS has securities laws that are stricter than the code of ethics. Which of the following is/are true?

  I. A member who lives in NL must always follow the AIMR code.

  II. A member who lives in MS is governed by the AIMR code.

  III. A member lives in NL but does business in MS. If MS laws apply to her business transactions, she must follow the AIMR code.

  IV.

  A member lives in LS and does business in NL. He must always follow the AIMR code.

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

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  Explanation

  An AIMR member must always adhere to the code of ethics, unless the laws governing his/her behavior are stricter, in which case, the stricter laws must be followed. A member governed by MS must always follow the MS laws since they are stricter. Standard I.