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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 22 )

Updated On: 26-Jan-2026
Page 22 of 793
PDF with 3960 Questions

A firm has to pay 1.5% fee to underwriters when it issues new equity. The firm has a dividend payout ratio of 37% and a return on equity of 13.9%. The firm has just announced earnings of $3.27 per share. If the stock's cost of external equity is 14.9%, how much capital would the firm raise by issuing 6 million shares?

  1. $111.12 million
  2. none of these answers
  3. $98.33 million
  4. $130.55 million

Answer(s): D

Explanation:

IF F is the percentage flotation cost and P is the amount of new equity raised per new share, then P = D1/[(Ke - g)(1-F)], where Ke is the cost of external equity and D1 is next year's expected dividend.
Also, g = ROE*retention ratio = ROE*(1-payout ratio) = 13.9%*(1-37%) = 8.76%. D1 = 3.27*0.37*(1+8.76%) = $1.316. Therefore, P = 1.316/[(1-1.5%)*(14.9% - 8.76%) = $21.76. By issuing 6 million shares, the firm will therefore raise 6*21.74 = $130.55 million.



Which of the following statements is most correct?

  1. None of the answers are correct.
  2. The modified internal rate of return (MIRR) can never exceed the IRR.
  3. All of the answers are correct.
  4. If the IRR of Project A exceeds the IRR of Project B, then Project A must also have a higher NPV.
  5. If a project with normal cash flows has an IRR which exceeds the cost of capital, then the project must have a positive NPV.

Answer(s): E

Explanation:

The IRR is the discount rate at which a project's NPV is zero. If a project's IRR exceeds the firm's cost of capital, then its NPV must be positive, since NPV is calculated using the firm's cost of capital to discount project cash flows.



Ace Consulting, a multinational corporate finance consulting firm, is performing an analysis of the East Asian distribution network of Smith, Kleen, and Beetchnutty. Specifically, Ace Consulting is trying to identify the effect of changes in specific variables on the overall efficiency of SKB's distribution process. In their analysis, Ace Consulting identified a "base case" situation using the expected values for each input. Then, Ace modified each variable a few points above and below the base case, holding other variables constant. This was done in an effort to determine the effect of each variable on the overall efficiency of SKB's distribution process. Which of the following choices correctly describes this stand-alone risk measurement technique?

  1. Monte Carlo simulation
  2. Scenario analysis
  3. Case study analysis
  4. Regression analysis
  5. Sensitivity analysis
  6. Relational analysis

Answer(s): E

Explanation:

In this example, Ace consulting has been conducting a sensitivity analysis. This analysis begins with the identification of a "base case" situation using expected values for each input. Then, a variable is manipulated holding the other variables constant, in an effort to determine the sensitivity of the output to manipulations in each variable. Sensitivity analysis is the most widely used technique for measuring stand-alone risk, and can be performed relatively easily using a commercially available spreadsheet package such as Microsoft Excel.



The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment?

  1. 4.35 years
  2. 4.00 years
  3. 5.23 years
  4. 4.86 years
  5. 6.12 years

Answer(s): D

Explanation:

Using the even cash flow distribution assumption, the project will completely recover initial investment after 30/35 = 0.86 of Year 5:
Payback = 4 + 30/35 = 4.86 years.



If debt financing is used, which of the following is correct?

  1. The percentage change in net operating income is greater than a given percentage change in net income.
  2. The percentage change in net operating income is less than the percentage change in net income.
  3. The percentage change in net operating income is equal to a given percentage change in net income.
  4. The percentage change in net operating income depends on the interest rate charged on debt.
  5. The degree of operating leverage is greater than 1.

Answer(s): B

Explanation:

This is because the interest charges on debt are included in net income and not operating income.



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