CFA Institute CFA Institute Certifications CFA-LEVEL-1 Questions & Answers

• Question 271:

  What is the value of a preferred stock with expected annual dividends of $20, and a required rate of return of 11%?

  A. $158.59

  B. $45.32

  C. Not enough information

  D. $181.82

  E. $20

  Correct Answer: D

  The value of a preferred stock is the present value of its dividends, which is equal to the annual dividend divided by the required rate of return. In this question, the preferred stock is worth 20/.11 = $181.82

• Question 272:

  Technical analysts

  A. use fundamental company information to find market trends.

  B. do not believe in market trends.

  C. try to take advantage of ongoing market trends.

  D. try to predict future market trends.

  Correct Answer: C

  Technical analysis, in contrast to the efficient market hypothesis and fundamental analysis, holds that past price and volume data can be used to discover market trends that can predict future market behavior. Technical analysts do not try to predict future market trends, but try to find and take advantage of current, ongoing ones.

• Question 273:

  A firm has a dividend payout ratio of 60%, and earns a 10% per year return on its equity. Calculate the expected annual growth rate of the firm's dividends.

  A. 8%

  B. Not able to compute with the above data.

  C. 7%

  D. 4%

  Correct Answer: D

  g=(RR)(ROE)=0.4*0.10.

• Question 274:

  The spread between k and g is the primary determinant of the size of the ________.

  A. Risk-free rate

  B. growth rate

  C. firm

  D. P/E

  Correct Answer: D

  The spread between k and g is the primary determinant of the size of the P/E.

• Question 275:

  The ________ Index is the ratio of Barron's average yield on 10 top grade corporate bonds to the yield on the Dow Jones average of 40 bonds.

  A. Dow-Barron

  B. Risk

  C. Confidence

  D. Bond Rating

  Correct Answer: C

  By definition, the Confidence Index is the ratio of Barron's average yield on 10 top grade corporate bonds to the yield on the Dow Jones average of 40 bonds. This index measures the difference in yield spread between premium grade bonds with a large cross section of bonds.

• Question 276:

  Assume the following information about a large food distributor.

  Retention rate = 0.38 Net income / sales = 0.11 Total assets / common equity = 1.9 Sales / total assets = 0.69

  What is the expected annual growth rate of this firm's dividends?

  A. 8.94%

  B. None of these answers is correct.

  C. 5.48%

  D. 11.51%

  E. 6.14%

  F. The answer cannot be determined from the information provided.

  Correct Answer: C

  A popular model for determining the growth rate of dividends is the following: g = RR * ROE Where: g = the expected growth rate of dividends, RR = the retention rate (this is equal to 1 - dividend payout ratio), and ROE = the return on equity. Although it may at first appear otherwise, all of the necessary information has been provided. Remember the Du Pont decomposition process for ROE, which breaks down the ROE figure into the following: ROE = (Net Income / Sales) * (Sales / Total Assets) * (Total Assets * Common Equity)

  Mathematically, this will reduce further into (Net Income / Common Equity)--- the ROE figure. The

  calculation of the return on equity for this company is as follows:

  ROE = [0.11 * 0.69 * 1.90] = 0.14421, or 14.42%.

  Now that the ROE figure has been determined, the calculation of the growth rate of dividends is as follows:

  g = [(0.38) * 0.1442] = 0.054796, or 5.48%

• Question 277:

  In describing competition within industries, five conditions have been identified that could affect the competitive structure and profits of an industry. Which of the following is not a condition identified by Reilly and Brown?

  A. Current rivalry

  B. Potential substitutes

  C. Bargaining power of buyers

  D. Threat of new entrants

  E. Bargaining power of suppliers

  F. Governmental regulations

  Correct Answer: F

  Once the competitive structure of an industry has been determined, the specific competitive strategy used by each firm in the industry should be determined and these strategies evaluated in terms of the overall competitive structure for the industry.

• Question 278:

  Porter contends that there are two competitive strategies that dictate how a firm has decided to cope with the five competitive conditions that define an industry's environment. The two competitive strategies are known as ________ and ________.

  A. low-cost strategy, differentiation strategy

  B. lay low strategy, differentiation strategy

  C. low-cost strategy, defensive leadership

  D. low-cost strategy, defensive strategy

  E. none of these answers

  Correct Answer: A

  Within each industry, the strategies available and the ways of implementing them differ.

• Question 279:

  A technical analyst with Bullfighter.com, a noted investment research firm, has been examining the U.S. securities markets, and believes that the market is technically "oversold." Which of the following technical indicators would this analyst likely use to support his opinion? Choose the best answer.

  A. There has been a decline in the Confidence Index.

  B. The Block Uptick-Downtick Ratio has declined below 0.70.

  C. The % of issues trading above their 200-day moving averages is greater than 80%.

  D. The Diffusion Index has increased significantly.

  E. The CBOE Put/Call Ratio is at 0.35.

  F. None of these answers is correct.

  Correct Answer: B

  The Block Uptick-Downtick Ratio is used by technical analysts to gauge institutional investment activity by measuring the percentage of block trades which result in an uptick versus the block trades which are executed on a downtick. The idea behind this ratio is the belief that a block buyer would initiate an "uptick", or a bid up in the securities' price, and a block seller would initiate a "downtick," or a bid down in the securities' price. Technical analysts view a decline in the Block Uptick-Downtick Ratio below 0.70 as an indication of an oversold condition, and an increase in the Block Uptick-Downtick Ratio above 1.10 as indicative of an overbought condition. The "Diffusion Index" is a measure of market breadth, and is defined as [(# of advancing issues + 1/2 # of issues unchanged) / # of issues traded]. An increase in the diffusion index is indicative of an increase in advancing issues relative to declining issues. The CBOE Put/Call Ratio is a contrarian technical indicator used to gauge the sentiment of investment professionals, and a ratio greater than 50% is viewed by technical analysts as overtly bullish. Finally, contrarian technical analysts would view a large increase in the amount of futures traders who express bullish sentiment on stock index futures as a bearish signal. The % of issues trading below their 200-day moving average is frequently cited by technical analysts as a measure of oversold and overbought market conditions. Specifically, technical analysts see the marketas "overbought" when 80% of issues are trading above their 200-day moving average, and consider a market "oversold" when 80% of issues are trading under their 200-day moving average.

• Question 280:

  Contrary-opinion technicians would view a high put/call ratio as

  A. a bearish sign.

  B. a sign of a market peak.

  C. a bullish sign.

  D. an unimportant statistic.

  E. a sign of a flat market.

  Correct Answer: C

  A high put/call ratio indicates that a relatively large number of investors are betting that the market will go down by holding put options. Contrary-opinion traders believe that such sentiment is the opposite of the truth; they view it as a bullish sign.