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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 19 )

Updated On: 26-Jan-2026
Page 19 of 793
PDF with 3960 Questions

A company is considering a project with the following cash flows:
TimeCash flow
0-$100,000
150,000
250,000
350,000
4-10,000
The project's cost of capital is estimated to be 10 percent. What is the modified internal rate of return (MIRR)?

  1. 11.25%
  2. 20.34%
  3. 14.25%
  4. 11.56%
  5. 13.28%

Answer(s): C

Explanation:

First, calculate the present value of costs:
N = 4, I/YR = 10, PMT = 0, FV = -10,000, and solve for PV = -$6,830.13.
Add -$100,000 + -6,830.13 = -$106,830.13.
Then, find the terminal value of inflows:
Shift to BEGIN MODE, N = 3, I/YR = 10, PV = 0, PMT = -50,000, and solve for FV = $182,050.
Finally, shift back to END mode, and solve for MIRR, where N = 4, PV = $-106,830, PMT = 0, FV = 182,050, and solve for I/YR = 14.25%.



An entrepreneur has invested $2.2 million in project A with an NPV of $245,000 and an estimated beta of 0.59. She has invested another $3.7 million in project B with an NPV of $320,000 and an estimated beta of 1.23. The firm's estimated beta equals ________.

  1. 1.11
  2. 0.72
  3. 1.23
  4. 0.99

Answer(s): D

Explanation:

The market value of project A equals $2.2 million + $245,000 = $2.445 million.
The market value of project B equals $3.7 million + $320,000 = $4.02 million.
The firm can be considered a portfolio of 2 projects. The beta of a portfolio equals the weighted average of the betas of the individual components. The weight of a component equals the fraction of the market value it comprises. Therefore, the firm's market value equals 2.445 + 4.02 = $6.465 million and its beta equals 2.445/6.465*0.59 + 4.02/6.465*1.23 = 0.99.



Consider the following information:
Borrowing Rate 10%
Marginal Tax Rate 40%
Preferred Stock Par Price $100
Preferred Dividend $10
Preferred Stock floatation cost 2.5%
Cost of common equity 12.0%
Preferred Stock issued at Par
The Optimal Capital Structure is 40% debt, 50% common equity, and 10% preferred stock. Credit Rating BB+ What is the firm's Weighted Average Cost of Capital (WACC)?

  1. 12.62%
  2. 7.42%
  3. 9.0%
  4. 8.0%
  5. 2.5%
  6. 9.42%

Answer(s): F

Explanation:

The firm's Weighted Average Cost of Capital (WACC) is a weighted average of the component cost of capital.
In this case 10%(borrowing rate) x (1-.4)Tax savings = 6% is the component cost of debt. $10 (preferred dividend) / 97.5(Par minus floatation cost) = 10.25% is the component cost of preferred stock. Thus the WACC = .4(6%) + .5(12%) + .1(10.25%) = 9.42%



Which of the following statements is most correct?

  1. None of these statements are correct.
  2. If a firm finds that the cost of debt financing is currently less than the cost of equity financing, an increase in its debt ratio will always reduce its cost of capital.
  3. A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, the cost of retained earnings is generally lower than the after-tax cost of debt financing.
  4. The capital structure which minimizes the firm's cost of capital is also the capital structure which maximizes the firm's stock price.
  5. The capital structure which minimizes the firm's cost of capital is also the capital structure which maximizes the firm's earnings per share.

Answer(s): D

Explanation:

The optimal capital structure is the one that maximizes the price of the firm's stock, and this generally calls for a debt ratio which is lower than the one that maximized expected EPS.



Suppose capital gains are taxed at 28% and realized income is taxed at 40%. The tax preference theory implies that as the dividend pay-out ratio is increased, the stock price:

  1. increases or decreases.
  2. decreases.
  3. increases.
  4. remains unaffected.

Answer(s): B

Explanation:

Since the capital gains tax rate is lower than the realized income tax rate, investors would prefer to defer the realization of this income through the capital gains component. Hence, increasing the payout ratio will make the stock less attractive and depress the price.



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