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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 971:

  Two sets of observations, A and B, each contain 160 observations. The variance of data in A equals 198.4 and that of the data in B equals 231.9. The two sets have the same mean. Then, A has a ________ dispersion and a ________ coefficient of variation.

  A. higher; higher
  B. lower; higher
  C. lower; lower
  D. higher; lower
  C. lower; lower

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  Explanation

  B has a higher variance and hence, a higher dispersion. The coefficient of variation equals the standard deviation divided by the mean. Since A and B have the same mean, B has a higher coefficient of variation.

• Question 972:

  Which of the following types of risk cannot be eliminated through diversification? Choose the best answer

  A. Unsystematic risk
  B. Market risk
  C. Corporate risk
  D. Alpha risk
  E. Gamma risk
  B. Market risk

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  Explanation

  Market risk is defined as that part of an asset's risk which cannot be eliminated through diversification. Market risk is measured by the Beta coefficient, and is commonly referred to as "systematic" or "nondiversifiable" risk. Additionally, market risk is referred to as "beta risk." Corporate risk is defined as the variability of assets expected returns without taking into consideration the effects of shareholder diversification. This is one step away from Stand-alone Risk, which measures the risk of an asset, not only without taking into consideration the effect of shareholder diversification, but of company diversification as well. Stand-alone risk assumes that the asset in question is the only asset of the firm and that the securities of the firm are the only assets in investors' portfolios. Corporate risk takes into consideration that firms will diversify their asset bases.

• Question 973:

  A statistician has framed his hypothesis testing problem as:

  Ho: mean = 0H1: mean > 0

  For the given sample, he calculates the z-statistic. Then, the region of rejection at the 99% level is given by:

  A. z-statistic > +2. 32
  B. z-statistic < 1.96
  C. z-statistic < -2. 32 or z-statistic > +2. 32
  D. z-statistic > +1.96
  A. z-statistic > +2. 32

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  Explanation

  Since the alternative is directional and to the right, we use a right-tailed test. For this, the critical value at 99% level is +2. 32. +2. 32 is the value above which only 1% of the probability mass of the standard normal distribution lies). The rejection region is then given by z-statistic > +2. 32.

• Question 974:

  Bay Co. purchased a 3-month U.S. Treasury bill. In preparing Bay's statement of cash flows, this purchase would

  A. have no effect.
  B. be treated as an outflow from lending activities.
  C. be treated as an outflow from financing activities.
  D. be treated as an outflow from operating activities.
  E. be treated as an outflow from investing activities.
  A. have no effect.

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  Explanation

  The T-bill is a cash equivalent and has no effect on the statement of cash flows. Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturities that they present insignificant risk of changes in value because of the changes in interest rates. They only include investments with original maturities to the holder of 3 months or less.

• Question 975:

  Cash received from the sale of fixed assets is an example of:

  A. cash flows from investing activities
  B. cash flows from operating activities
  C. cash flows from financing activities
  D. cash flows from noncash investing and financing activities
  A. cash flows from investing activities

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  Explanation

  Investing activities usually involve activities that affect long-term assets.

• Question 976:

  Assume the following information about a publicly traded pharmaceutical firm:

  Revenue: $25,000,000 Cash flow: $8,750,000 Net worth per share: $12. 97 Number of common shares outstanding: 1,750,000 Current stock price per share: $41.32

  Using this information, what are the price-to-sales, price-to-book, and price-to-cash flow ratios, respectively?

  A. The answer cannot be completely calculated from the information provided.
  B. 0.35, 0.31, 0.024
  C. 2. 89, 3. 19, 8.44
  D. 0.35, 4. 62, 0.024
  E. 2. 89, 3. 19, 8.26
  E. 2. 89, 3. 19, 8.26

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  Explanation

  To calculate the price-to-sales ratio, divide the market price of a common stock by its sales-per share figure. The equation for the price-to-sales ratio is as follows:

  Price-to-sales ratio = [P0 / sales per share].

  Incorporating the given information into this equation will yield the following: Price-to-sales ratio = [$41.32 / ($25,000,000 / 1,750,000)] = 2. 8924 The calculation of the price-to-book ratio involves dividing the market price of a common stock by

  its net worth per share. The equation for the price-to-book ratio is as follows:

  Price-to-book ratio = [P0 / net worth per share].

  Where: net worth per share = (total assets - total liabilities) / # of common shares outstanding.

  In this example, the net worth figure has been converted to a per-share basis, and the calculation of the price-to-book ratio is straightforward:

  Price-to-book ratio = ($41.32 / $12. 97) = 3. 18581

  The calculation of the price-to-cash flow ratio involves dividing the market price of a common stock by the cash-flow-per-share figure. The calculation of the price-to-cash flow ratio is as follows:

  Price-to-cash flow = (P0 / cash flow per share)

  In this example, the cash flow figure must be converted to a per-share basis, as follows: Cash-flow-per-share = ($8,750,000 / 1,750,000) = $5. 00 Now that the cash-flow-per-share has been determined, the price-to-cash-flow ratio can be

  calculated. Incorporating the given information into this equation will yield the following:

  Price-to-cash flow = [$41.32 / $5} = 8.264

• Question 977:

  Alice Treehorn, a portfolio manager for a private investment firm, uses a specific methodology for identifying investment opportunities. Specifically, Ms. Treehorn begins with an examination of macroeconomic cycles and the overall global

  investment environment. After promising areas have been identified, Ms. Treehorn then progresses in her analysis to an examination of governmental and regulatory influences in each geographical region, as well as the prospect for specific

  industries in each region.

  Finally, the analysis concludes with an examination of specific securities.

  Which of the following best characterizes the investment approach taken by Alice Treehorn?

  A. Security valuation approach
  B. Top down approach
  C. Root analysis
  D. Macroeconomic cycle approach
  E. Bottom up approach
  F. None of these answers is correct.
  B. Top down approach

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  Explanation

  The approach detailed in this example is best characterized as the "top down" approach. Securities industry professionals commonly use the top down approach to identify investment opportunities, and this method has a strong following in

  both the academic and professional arenas. The process involved in the top down approach begins with an examination of the macroeconomic environment, then progresses to governmental, security market analysis and industry analysis,

  and finally to an examination of specific securities.

  The top down approach is contrasted by the bottom up approach, which begins with an examination of specific companies and their securities.

• Question 978:

  Which of the following is considered a characteristic of equity?

  A. None of these answers.
  B. All forms of equity must ultimately be repaid by a business.
  C. Compensation to the holders of equity takes precedence over that required to the holders of liabilities.
  D. Equity represents the residual ownership of a business.
  E. Equity represents a claim against a business that is senior to liabilities.
  D. Equity represents the residual ownership of a business.

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  Explanation

  Equity refers to the claims of the owners of a business. Equity investors expose themselves to greater risk than the holders of liability claims because owner's claims are junior to liability instruments. Equity claims against income and assets are last in line; thus, they are residual.

• Question 979:

  Stockholders' Equity is

  A. the rights to the assets of the business once the liabilities have been met
  B. assets plus liabilities
  C. all of these answers are correct
  D. the financial obligations of the company
  A. the rights to the assets of the business once the liabilities have been met

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  Explanation

  The accounting equation shows us that the Assets (Own) are equal to the Liabilities (obligations) plus the Stockholders' Equity.

• Question 980:

  J_Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. The firm's preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will net only $80 per share from the sale of new preferred stock. Ross expects to retain $15,000 in earnings over the next year. Ross' common stock currently sells for $40 per share, but the firm will net only $34 per share from the sale of new common stock. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. What is the firm's cost of retained earnings?

  A. 15. 5%
  B. 12. 5%
  C. 10.0%
  D. 18.0%
  E. 16. 5%
  A. 15. 5%

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  Explanation

  k(s) = $2. 20/$40 + 0.10 = 15. 5%.