Test On Equity Investments For CFA Level 1

20 Questions | Total Attempts: 1978

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CFA Quizzes & Trivia

There are 20 questions in this test from the Equity Investments section of the CFA Level 1 syllabus. You will get 30 minutes to complete the test.


Questions and Answers
  • 1. 
    A stock has provided dividend = $2 during last year and next year’s dividend is 10% higher, the price will be $40 at year-end, the risk-free rate is 5%, the market premium is 5%, and the stock’s beta is 1.2. If the beta of the stock is increased to 1.5, its stock price will
    • A. 

      Increase

    • B. 

      Remain unchanged

    • C. 

      Decrease

  • 2. 
    In a standard dividend discount model (DDM) which of the following factors is least likely to affect the required rate of return on the investment?
    • A. 

      Expected inflation rate

    • B. 

      Risk-free rate of return

    • C. 

      ROA

  • 3. 
    The price to book value ratio (P/BV) is a helpful valuation technique when examining firms:
    • A. 

      That hold primarily liquid assets

    • B. 

      With higher Return on Equity

    • C. 

      With similar profitability margins

  • 4. 
    Which of the following statements regarding a country risk premium is most accurate?
    • A. 

      Country risk arises from expected economic and political events

    • B. 

      Exchange rate risk is relatively small and can be ignored

    • C. 

      Firms in different countries assume significantly different financial risk

  • 5. 
    Which of the following statements concerning security valuation is least accurate?
    • A. 

      An investor may determine the required rate of return for the dividend discount model (DDM) by adding a risk premium multiplied by beta and adding the product to the nominal risk-free rate

    • B. 

      Business risk is a component of a country's risk premium

    • C. 

      An investor can estimate the growth rate for the dividend discount model (DDM) by multiplying the firm's return on capital employed (ROCE) by the firm's dividend payout ratio

  • 6. 
    Assume that at the end of the next year, Company A will pay a $2.00 dividend per share, an increase from the current dividend of $1.50 per share. After that, the dividend is expected to increase at a constant rate of 5%. If an investor requires a 12% return on the stock, what is the value of the stock?
    • A. 

      $28.57

    • B. 

      $30.00

    • C. 

      $31.78

  • 7. 
    Assume a company's ROE is 10% and the required return on equity is 9%. Everything else remaining same, if there is a decrease in a firm’s payout rate, a stock’s value as estimated by the constant growth dividend discount model (DDM) will most likely:
    • A. 

      Decrease

    • B. 

      Increase

    • C. 

      Either increase or decrease

  • 8. 
    Calculate the value of a preferred stock that pays an annual dividend of $5.50 if the current market yield on AAA rated preferred stock is 75 basis points above the current T-Bond rate of 7%.
    • A. 

      $42.63

    • B. 

      $78.57

    • C. 

      $70.97

  • 9. 
    Assuming a firm does not currently have excessive debt, a decrease in leverage will most likely cause the firm’s stock price to:
    • A. 

      Remain the same

    • B. 

      Decrease

    • C. 

      Increase

  • 10. 
    Following data for XYZ, Inc is available: • Retention = 30% • ROE = 20% • k = 12% Using the infinite period, or constant growth, dividend discount model, what would be the value that a CFA analyst would get for the price of XYZs stock assuming that next years earnings will be $4.25.$5
    • A. 

      $58.30

    • B. 

      $45.45

    • C. 

      $83.3

  • 11. 
    Use the following information to determine the value of Buckhill common stock: I. Expected dividend payout ratio is 45%. II. Expected dividend growth rate is 6.5%. III. Required return is 12.4%. IV. Expected earnings per share next year are $3.25.
    • A. 

      $30.12

    • B. 

      $24.80

    • C. 

      $27.25

  • 12. 
    If a preferred stock that pays a $11.50 $10 dividend is trading at $88.46, $ 90 what is the market’s required rate of return for this security?
    • A. 

      9.00%

    • B. 

      11.11%

    • C. 

      7.69%

  • 13. 
    A firm will not pay dividends until four years from now. Starting in year four dividends will be $2.20 per share, the retention ratio will be 40%, and ROE will be 15%. If k = 10%, what should be the value of the stock?
    • A. 

      $41.32

    • B. 

      $55.25

    • C. 

      $58.89

  • 14. 
    Which of the following statements concerning security valuation is least accurate?
    • A. 

      Accounting methods will be constant across countries

    • B. 

      If the return on new investments is higher than the return the firm is earning on its existing investments, the firm is considered a growth firm

    • C. 

      The business risk component of a country's risk premium is a function of the variability of economic activity in the country and the average operating leverage used by firms in the country

  • 15. 
    Value of a 15-year, 8.5% annual coupon bond callable in five years is at 95.6 (prices are stated as a percentage of par). A straight bond that is similar in all other aspects as the callable bond is priced at 100.0. Which of the following is closest to the value of the call option?
    • A. 

      2.5

    • B. 

      4.4

    • C. 

      8.5

  • 16. 
    Which of the following statement is least accurate for a Top Down equity analysis Approach?
    • A. 

      Most valuation models, after top down analysis, recommends the required returns on equity, rather than average industry returns

    • B. 

      The goal of the top-down approach is to identify those companies in non-cyclical industries with the lowest p/e ratios

    • C. 

      An industry's prospects within the global business environment are a major determinant of how well individual firms in the industry perform

  • 17. 
    Which of the following 10-year fixed-coupon bonds has the least price volatility? All else equal, the bond with a coupon rate of:
    • A. 

      6.00%

    • B. 

      5.00%

    • C. 

      8.00%

  • 18. 
    A company currently has a required return on equity of 14% and an ROE of 12%. All else equal, if there is an increase in a firm’s dividend payout ratio, the stock's value will most likely:
    • A. 

      Either increase or decrease

    • B. 

      Decrease

    • C. 

      Increase

  • 19. 
    A 8% coupon bond with semi-annual coupon payments on a coupon payment date when the coupon has not been paid yet and the bond has a $1,000 par value. what is the bond's full price?
    • A. 

      $1,040

    • B. 

      $1,000

    • C. 

      $1,080

  • 20. 
    Which of the following statements is Most accurate when valuing a security? The:
    • A. 

      Required rate of return for the dividend discount model is influenced by inflation

    • B. 

      Dividend discount model assumes that the required rate of return is lesser than the growth rate of the company's dividend

    • C. 

      Real risk-free rate is the nominal risk-free rate times the expected inflation rate

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