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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 100 )

Updated On: 26-Jan-2026
Page 100 of 793
PDF with 3960 Questions

The Global Advertising Company had net income after interest but before taxes of $40,000 this year. The marginal tax rate is 40 percent, and the dividend payout ratio is 30 percent. The company can raise debt at a 12 percent interest rate. The last dividend paid by Global was $0.90. Global's common stock is selling for $8.59 per share, and its expected growth rate in earnings and dividends is 5 percent. If Global issues new common stock, the flotation cost incurred will be 10 percent. Global plans to finance all capital expenditures with 30 percent debt and 70 percent equity. What is the break point due to retained earnings being used up?

  1. $17,000
  2. $24,000
  3. $10,000
  4. $30,000
  5. $56,000

Answer(s): B

Explanation:

Calculate net income and retained earnings
EBT$40,000
Less: Taxes$16,000
NI$24,000
RE = 0.70($24,000) = $16,800.
Break point retained earnings:
BP(RE) = $16,800/0.70 = $24,000.



A firm's capital structure consists of 25% debt with a pre-tax cost of 7% and an after-tax cost of 4.9%. Common equity makes up 45% of the structure and the rest is made up of preferred equity. Thepreferred stock has a coupon of 8% and is currently trading at 84% of its par value. The required rate of return on the common stock is 16.2%. The firm's WACC is ________.

  1. 11.5%
  2. 10.92%
  3. 11.37%
  4. 11.90%

Answer(s): C

Explanation:

To get the WACC in this case, you need to have information on the cost of preferred stock. This is not necessarily equal to the coupon rate on the preferred equity. Rather, it is the discount rate, R, that equates the present value of the perpetual payments on the preferred equity to its current price. The price of a perpetuity that pays C per year, at a discount rate of R, equals C/R. In this problem, since the preferred stock is at 84% and pays 8% coupon, we have 84% = 8%/R, giving R = 9.52%. Now, the interest payments on debt are tax- deductible but those on preferred equity are not. Hence, no tax adjustment is necessary for preferred stock but you must use after-tax cost of debt in WACC calculations. With this in mind, WACC = 0.25*4.9% + 0.45*16.2% + 0.3*9.52% = 11.37%.



O'Donnell Inc. has a cost of capital of 11.5 percent. The company has a project with the following cash flows:
Year Cash flow
0-$200
1 235
2-65
3 300
What is the project's modified internal rate of return (MIRR)?

  1. 28.15%
  2. 39.87%
  3. 40.15%
  4. 32.90%
  5. 36.27%

Answer(s): D

Explanation:

Step 1 Find the PV of the outflows:
CF(0) = -200
CF(1) = 0
CF(2) = -65
I = 11.5
Solve for NPV = -$252.28.
Step 2 Find the TV of the inflows by first finding their NPV and then finding the FV of the NPV:
CF(0) = 0 N = 3
CF(1) = 235 I = 11.5
CF(2) = 0 PV = -427.18
CF(3) = 300 PMT = 0
I = 11.5 Solve for FV = $592.16.
Solve for NPV = $427.18.
Step 3 Calculate the MIRR by equating the PV of the outflows with the TV of the inflows:
N = 3
PV = -252.28
PMT = 0
FV = 592.16
Solve for I = 32.90%.



The most commonly held view of capital structure, according to the text, is that the weighted average cost of capital ________.

  1. increases proportionately with increases in leverage
  2. does not change with leverage
  3. none of these answers
  4. increases with moderate amounts of leverage and then falls
  5. first falls with moderate levels of leverage and then increases

Answer(s): E

Explanation:

The optimal capital structure must strike a balance between risk and return which maximizes the firm's stock price. Using more debt raises the risk borne by stockholders, however, using more debt leads to a higher expected rate of return.



If you are going to invest in a closed-end mutual fund and were told that the net asset value of the fund is $11.20, and the share price was $11.80. What is the discount you would receive or the premium that you would pay?

  1. -0.0508.
  2. 0.0508.
  3. 0.0536.
  4. -0.0536.

Answer(s): C

Explanation:

(SP-NAV)/NAV=
(11.80-11.20)/11.20=0.05357



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