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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 941:

  Dwight and Clark (a large manufacturing firm) is a stable company reporting the following financial information:

  Earnings per share $1.50 Dividends per share $0.30 Net Income $10 million Equity $50 million

  Given the above information, calculate the company's expected dividend growth rate.

  A. 80%
  B. 20%
  C. 1.6%
  D. 16%
  E. 33%
  F. 8%
  D. 16%

  ---

  Explanation

  The expected dividend growth rate = (Retention Rate) x (Return on Equity). Retention Rate = 1 - Payout Rate. Return on Equity = NI/E. Thus in this case the expected dividend growth rate = 1 - (.3/1.5) x ($10 million/$50 million) = (1 - .2) x (.2) = .16 or 16%.

• Question 942:

  Joseph Silk is a veteran money manager with Aakanksha, Inc., a hedge fund that caters to high net-worth individuals. His friend, Gribbin, recently incorporated a private business and invited Joseph to be on its board of directors. Gribbin's business is in the paper industry and does not directly or indirectly affect Aakanksha's client base. Joseph accepted the board membership with the understanding that he would participate in Gribbin's business only over the weekends. He considered this a private venture and did not inform Aakanksha's Compliance officer. In not doing so, Joseph has

  A. violated Standard III (C) - Disclosure of Conflicts to Employer.
  B. not violated any standards since there is no conflicts of interest between his two professional obligations.
  C. violated Standard IV (A.3) - Independence and Objectivity.
  D. violated Standard IV (B.1) - Fiduciary Duties.
  A. violated Standard III (C) - Disclosure of Conflicts to Employer.

  ---

  Explanation

  While Gribbin's business is not in any competition with Aakanksha, Joe's position as a director creates an appearance of conflicts of interest since he will have a say in many decisions of the business, including investments in securities. Hence, before accepting any such position, Joe must discuss the situation with the compliance department at Aakanksha to evaluate the potential conflicts of interest. While Joe is not precluded from being on an outside Board, not getting this cleared with his current employer represents a violation of Standard III (C) - Disclosure of Conflicts to Employer.

• Question 943:

  Patterson Company has the following information of one of its vehicles purchased on January 1, 1992:

  Vehicle cost $50,000 Useful life, years, estimated 5 Useful life, miles, estimated 100,000 Salvage value, estimated $10,000

  Actual miles driven:

  1992 30,000 1993 10,000 1994 15,000 1995 25,000 1996 12,000

  No estimates were changed during the life of the asset. The 1994 depreciation expense using the sum-of-years'-digits (SYD) method was ________.

  A. $13,333
  B. $8,000
  C. $10,667
  D. $10,000
  E. $6,000
  B. $8,000

  ---

  Explanation

  SYD depreciation is calculated on a constant depreciable base equal to $40,000 ($50,000 original cost -10,000 salvage value), multiplied by the SYD fraction. The denominator is the sum of the digits of the total years of the expected useful life (1+2+3+4+5=15). The SYD fraction's numerator equals the remaining years. For 1994, the fraction is 3/15, and depreciation expense is $8,000 ($40,000 X 3/15).

• Question 944:

  How much must you deposit today if you wish to have $30,000 in 20 years, assuming that interest accumulates at 8% per year, compounded annually?

  A. $6,436. 45
  B. $7,046. 51
  C. $3,000.00
  D. $5,045. 65
  E. $6,604. 73
  A. $6,436. 45

  ---

  Explanation

  On the BAII Plus, press 20 N, 8 I/Y, 0 PMT, 30000 FV, CPT PV. On the HP12C, press 20 n, 8 i, 0 PMT, 30000 FV, PV. Note that the answer is displayed as a negative number. Make sure that the BAII Plus has the P/Y value set to 1.

• Question 945:

  A piece of equipment costs $200,000, has a useful life of 5 years and an estimated salvage value of $50,000. How much depreciation expense should the company recognize in year 4 if it is using the sum-of-the- years' digits method of depreciation?

  A. $30,000
  B. $80,000
  C. $26,666. 67
  D. $20,000
  D. $20,000

  ---

  Explanation

  Using the sum-of-the-years' digits the sum of the years is 15. In year 4 you would take 2/15 of the cost less the salvage value. 2/15 of $150,000 is equal to $20,000.

• Question 946:

  Which of the following statements is least likely to be a unique risk associated with a hedge fund?

  A. Cash needs arising from marking positions to market.
  B. Unexpected absence of normal liquidity under extreme market conditions.
  C. Higher volatility of returns as compared to traditional equity funds.
  C. Higher volatility of returns as compared to traditional equity funds.

  ---

  Explanation

• Question 947:

  Ward is scheduled to visit the corporate headquarters of Evans Industries. Ward expects to use the information obtained to complete his research report on Evans stock. Ward learns that Evans plans to pay all of Ward's expenses for the trip, including the cost of meals, hotel room and air transportation. Which of the following actions would be the best course for Ward to take under the Code and Standards?

  A. Accept the expense-paid trip and write an objective report.
  B. Write the report without taking the trip.
  C. Pay for all travel expenses, including costs of meals and incidental items.
  D. Accept the expense paid trip but disclose the value of the services accepted in the report.
  C. Pay for all travel expenses, including costs of meals and incidental items.

  ---

  Explanation

  The best course of action, under Standard IV (A.3), Independence and Objectivity, is to avoid a conflict of interest whenever possible. Therefore, paying for all expenses is the correct answer. Merely disclosing the conflict is not as appropriate as avoiding the conflict of interest altogether. Writing an objective report would not remove the appearance of a conflict of interest. Not taking the trip is incorrect, because Ward would not be taking advantage of close inspection of the company and his report would not be using all the information available.

• Question 948:

  A net advance on an advance-decline series for the NYSE, coupled with a declining SandP 500 would, according to technical analysts,

  A. signal a market trough.
  B. signal a period of market unpredictability.
  C. signal a market peak.
  D. signal a temporary reprieve from the bear market.
  A. signal a market trough.

  ---

  Explanation

  Technical analysts predict that when a market index is declining, but most stocks post price increases, the market is near its trough. Conversely, they predict that when a market index is increasing, but most stocks post price declines, the market is near its peak.

• Question 949:

  The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net working capital of $2,000. The computer would increase the firm's before-tax revenues by $20,000 per year but would also increase operating costs by $5,000 per year. The computer is expected to be used for 3 years and then be sold for $25,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 14 percent. What is the net investment required at t = 0?

  A. -$36,600
  B. -$40,000
  C. -$38,600
  D. -$42,000
  E. -$37,600
  D. -$42,000

  ---

  Explanation

  Initial investment:

  Cost($40,000)

  Change in NWC(2,000)

  ($42,000)

• Question 950:

  Assuming that an expansionary fiscal policy package could be enacted and implemented immediately, approximately how far in advance would be problem of a lagging economy need to be recognized?

  A. 1-2 years
  B. 6 months to 1 year
  C. impossible to determine
  D. if policy could be enacted immediately, timing would not be a problem
  E. 1 year
  C. impossible to determine

  ---

  Explanation

  One of the primary problems with fiscal policy is one of timing. Any stimulus package would take time to work its way through the economy. For example, if unemployment were high and the government passed fiscal policy legislation involving many new hires, it would take time for the new employees to be hired, then they would go through training, and probably not begin productive work for many months. Furthermore, the new income the employees now receive would be spent on goods, which would become income for other individuals, etc. This creates a multiplier effect over time. How long this will take to be fully realized is impossible to determine.