HOTSPOT
Your network contains an Active Directory domain named contoso.com. The domain
contains domain controllers that run either Windows Server 2003, Windows Server 2008 R2,
or Windows Server 2012 R2.
You plan to implement a new Active Directory forest. The new forest will be used for testing
and will be isolated from the production network.
In the test network, you deploy a server named Server1 that runs Windows Server 2012 R2.
You need to configure Server1 as a new domain controller in a new forest named
contoso.test.
The solution must meet the following requirements:
The functional level of the forest and of the domain must be the same as that of contoso.com.
Server1 must provide name resolution services for contoso.test.
What should you do?
To answer, configure the appropriate options in the answer area.
Answer: 
Explanation:
Answer = FFL = Windows Server 2003, DFL = Windows Server 2003
http://technet.microsoft.com/en-us/library/understanding-active-directory-functional-levels%28v=ws.10%29.aspx
Bobsmith is correct but the line “Server 1 must provide name resolution services for contoso.test” means that the DNS checkbox also needs to be checked.
Correct, its easy to miss out the dns part by not fully reading the question.
My opinion is that the answer should be set to both 2003 functional level and tick the DNS server box
The oldest domain controller in the contoso.com domain is 2003, therefore the functional levels are 2003 “The functional level of the forest and of the domain must be the same as that of contoso.com” means that the new forest/domain must have 2003 as its functional levels.
“Server1 must provide name resolution services for contoso.test” – tick the box to make it a DNS server.
https://technet.microsoft.com/en-us/library/understanding-active-directory-functional-levels(v=ws.10).aspx
“When you deploy a new forest, you are prompted to set the forest functional level and then set the domain functional level. You cannot set the domain functional level to a value that is lower than the forest functional level.”
“You can set the domain functional level to a value that is higher than the forest functional level. For example, if the forest functional level is Windows Server 2003, you can set the domain functional level to Windows Server 2003 or higher.”
So forest functional level: Server 2003
Domain functional level: Server 2003 (i don’t find this answer to be completely correct, because you can select server 2003 or higher, like stated by microsoft)
And you have to also select DNS checkbox.
“The functional level of the forest and of the domain must be the same as that of contoso.com.”
Both functional levels have to be set at 2003 because of the 2003 DC running in contoso.com. The domain functional level may not be higher than the oldest version of Windows running on a DC in the domain.