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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 981:

  Standard III (D) deals with ________.

  A. Professional Misconduct
  B. Use of Professional Designation
  C. Plagiarism
  D. Fundamental Responsibilities
  E. None of these answers
  F. Obligation to Inform Employer of Code and Standards
  E. None of these answers

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  Explanation

  Standard I deals with Fundamental Responsibilities. Standard II (A) deals with Use of Professional Designation. Standard II (B) deals with Professional Misconduct. Standard II (C) deals with Plagiarism. Standard III (A) deals with the Obligation to Inform Employer of Codes and Standards. Standard III (D) deals with the Disclosure of Additional Compensation Arrangements.

• Question 982:

  Genetree Labs, a small biotechnology company focused on human stem cell research, is best characterized by which stage of the industrial life cycle? Further, what degree of earnings payout are shareholders likely to require from Genetree Labs? Assume that Genetree Labs is exclusively a research firm, and is in the process of developing its product line.

  A. Pioneering and development stage, high payout ratio
  B. Market stabilization stage, low payout ratio
  C. Pioneering and development stage, low payout ratio
  D. Accelerating growth stage, high payout ratio
  E. None of these answers is correct.
  F. Accelerating growth stage, low payout ratio
  C. Pioneering and development stage, low payout ratio

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  Explanation

  The industry life cycle is divided into five distinct stages. Specifically, the industrial life cycle progresses from the development stage to an accelerating growth stage to a mature growth stage to a market maturation and stabilization stage. Finally, the fifth stage of the industrial life cycle is characterized by decelerating growth and sales decline. During the mature growth stage, sales are still growing, albeitslowly. During the last stage of the industrial life cycle, however, is characterizes by a decline in annual sales.

  As an industry or company progresses through the industrial life cycle, sales begin to grow rapidly (accelerating growth) then slow considerably as the product or service begins to reach critical mass (mature growth). During the mature growth stage, the industry or company grows at a slower pace, until eventually growth begins to slow considerably (market maturity and stabilization) as the market for the industry or company's products becomes more completely defined. An industry or company typically reaches the fifth stage of the industrial life cycle, growth deceleration and decline, only after many years of stabilization.

  The firm profiled in this example is in the pioneering and development stage, as evidenced by the Company's complete lack of sales or product line. Genetree Labs is in the process of developing a product, and is exclusively a RandD firm. So said, this Company is an example of the pioneering and development stage of the industrial life cycle. Shareholders of Genetree will likely expect a low dividend payout ratio, giving up current income for the prospect of future earnings growth,

  i.e. shareholders will prefer that earnings are "plowed back" into the operation of Genetree rather than be distributed as dividends. This is augmented by the fact that firms in the pioneering and development stage are likely to have superior

  investment opportunities, which leads directly to a lower payout ratio.

  If you chose "accelerating growth," remember that the firm profiled in this example has no sales or existing product. Genetree Labs is in the development stage.

• Question 983:

  Which of the following statements is most correct?

  A. The NPV method assumes that cash flows will be reinvested at the risk-free rate while the IRR method assumes reinvestment at the IRR.
  B. The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the risk-free rate.
  C. The NPV method does not consider the inflation premium.
  D. The IRR method does not consider all relevant cash flows, and particularly cash flows beyond the payback period.
  E. The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the IRR.
  E. The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the IRR.

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  Explanation

  The NPV method implicitly assumes that the rate at which cash flows can be reinvested is the cost of capital, whereas the IRR method assumes that the firm can reinvest at the IRR.

• Question 984:

  The formula for conditional probability is given by:

  A. P(A | B) = P(AB) / P(B)
  B. P(A | B) = P(AB) / P(A)
  C. P(A | B) = P(AB) * P(A)
  D. P(A | B) = P(AB) * P(B)
  A. P(A | B) = P(AB) / P(B)

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  Explanation

  A conditional probability takes the form of P(A | B) = P(AB) / P(B), where P(B) does not equal 0. Note that this is just a rearranged form of the formula for joint probability.

• Question 985:

  In a large metropolitan area, past records revealed that 30 percent of all the high school graduates go to college. From 20 graduates selected at random, what is the probability that exactly 8 will go to college?

  A. 0.114
  B. 0.400
  C. 0.231
  D. 0.887
  E. None of these answers
  A. 0.114

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  Explanation

  This is a binomial probability. The probability of getting r successes out of n trials where the probability of success each trial is p and probability of failure each trial is q (where q = 1-p) is given by: n!(p^r)[q^(n-r)]/r!(n-r)!. Here n = 20, r = 8,p =

  0.3 and q = 0.7. Therefore we have 20!(0.3^8)(0.7^12)/8!12! = 0.114.

• Question 986:

  What is the annual Internal Rate of Return of this series of annual cash flows: Year 0: <$25,000>, Year 1: $2,000, Year 2: $0, Year 3: $15,000, Year 4 to indicate a negative number).

  A. 10.04%
  B. 15. 29%
  C. 11.59%
  D. 8.61%
  E. 9.13%
  E. 9.13%

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  Explanation

  On the BAII Plus, press CF 2nd CLRWork 25000 +/- ENTER DownArrow 2000 ENTER DownArrow DownArrow 0 ENTER DownArrow DownArrow 15000 ENTER DownArrow DownArrow 0 ENTERDownArrow DownArrow 18000 ENTER DownArrow DownArrow 2nd Quit. Then press Irr CPT. On the HP12C, press these keys: 25000 CHS BlueShift CFo 2000 BlueShift CFj 0 BlueShift CFj 15000 BlueShift CFj 0 BlueShift CFj 18000 BlueShift CFj. Then press YellowShift Irr. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure the BAII Plus has the P/Y value set to 1.

• Question 987:

  Which of the following is/are component(s) of Shareholder's equity?

  I. Preferred equity

  II. Retained earnings

  III.

  Treasury shares

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

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  Explanation

  All of the selections appear in the Shareholders' Equity section of the balance sheet.

• Question 988:

  Kerry Garrett, CFA, manages a hedge fund. The hedge fund industry has enjoyed strong growth over the past ten years. Garrett states that the hedge fund industry has a goal of absolute returns. In addition, Garrett states that the industry's high Sharpe ratio indicates that hedge funds are superior investment vehicles. Is Garrett correct with regard to his statement on hedge fund returns and/or his statement on hedge funds as superior investment vehicles?

  A. Only the statement on return is correct.
  B. Only the statement on superiority is correct.
  C. None
  A. Only the statement on return is correct.

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  Explanation

• Question 989:

  Monte Carlo simulation

  A. All of the answers are correct.
  B. Is capable of using probability distributions for variables as input data instead of a single numerical estimate for each variable.
  C. Produces both an expected NPV (or IRR) and a measure of the riskiness of the NPV or IRR.
  D. None of the answers are correct.
  E. Can be useful for estimating a project's stand-alone risk.
  A. All of the answers are correct.

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  Explanation

  These are all true.

• Question 990:

  Use the following financial data on Enterprise:

  a.

  Sale of equipment $32,000

  b.

  Loss on equipment sale $9,000

  c.

  Dividends paid $12,500

  d.

  Purchase of an office suite $104,000

  e.

  Common stock repurchase $45,000

  f.

  Dividends received from investments $8,500

  g.

  Interest received on Treasury bonds $1,200

  h.

  Supplier accounts paid $3,700

  i.

  Cash collection from customers $14,200

  j.

  Ending cash balance $98,000 $198,300

  In the above question, the beginning cash balance of the firm was ________.:

  A. $216,300
  B. .$207,300
  C. C$198,300
  D. $109,300
  B. .$207,300

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  Explanation

  Note that the loss on equipment is a non-cash event. Using the direct method, beginning cash balance + net cash inflow = ending cash balance Hence, beginning balance = 98,000 - (32,000 -12,500 -104,000 - 45,000 + 8,500 +1,200 - 3,700

  + 14,200) = $207,300.