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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 16 )

Updated On: 26-Jan-2026
Page 16 of 793
PDF with 3960 Questions

Which of the following is most likely to encourage a company to use more debt in its capital structure?

  1. All of these answers are correct.
  2. An increase in unit production.
  3. An increase in the corporate tax rate.
  4. An increase in the company's degree of operating leverage.
  5. An increase in the personal tax rate.

Answer(s): C

Explanation:

A major reason for using debt is that interest is deductible, which lowers the effective cost of debt.



A firm has a dividend growth rate of 2.8%. It typically pays out 48% of its earnings as dividends. Recently, it paid out $2.4 per share dividend and the required rate of return on its stock is 13%. The firm's return on equity equals ________.

  1. 5.83%
  2. 5.38%
  3. insufficient information
  4. 12.19%

Answer(s): B

Explanation:

g = ROE*(1 - dividend payout ratio). Therefore, ROE = 0.028/(1 - 0.48) = 5.38%.



Which of the following statements is most correct?

  1. None of the statements are correct.
  2. The discounted payback method solves all the problems associated with the payback method.
  3. The NPV method is appealing to some managers because it produces a dollar amount upon which to base decisions rather than a IRR method.
  4. All of the statements are correct.
  5. For independent projects, the decision to accept or reject will always be the same using either the IRR method or the NPV method.

Answer(s): E

Explanation:

For mutually exclusive projects, a conflict can exist if the cost of capital is less than the crossover rate.



Adams Audio is considering whether to make an investment in a new type of technology. Which of the following factors should the company consider when it decides whether to undertake the investment?

  1. None of these factors should be considered.
  2. The installation costs for the new equipment for the new technology are very high.
  3. The new technology will affect the cash flows produced by its other operations.
  4. If the investment is not made, then the company will be able to sell one of its laboratories for $2 million.
  5. All of these factors should be considered.

Answer(s): E

Explanation:

These are all incremental cash flows which change the firm's total cash flow that occurs as a direct result of accepting the project, and should all be considered



Which of the following statements about capital structure theory is most correct?

  1. In general, an increase in the corporate tax rate would cause firms to use less debt in their capital structures.
  2. Signaling theory suggests firms should in normal times maintain reserve-borrowing capacity which can be used if an especially good investment opportunity comes along.
  3. All of the statements are correct.
  4. None of the statements are correct.
  5. According to the "trade-off theory," a decrease in the costs of debt would lead firms to increase equity financing in their capital structures.

Answer(s): B

Explanation:

An increase in the corporate tax rate reduces the after-tax cost of debt making it more attractive relative to equity. Thus, firms might be expected to use more debt. The trade-off theory of leverage states a firm trades off the benefits of debt financing (favorable corporate tax treatment) against the higher interest rates and bankruptcy costs.



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