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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 26 )

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

Which of the following are methods of estimating a company's Cost of Retained Earnings?

  1. CAPM
    II. CANSLIM
    III. DCF Method
    IV. Bond-Yield-plus-Risk-Premium
  2. Least Cost Debt vs. Equity
  3. I, III, IV, & V
  4. I, II, III, IV, & V
  5. I, III & IV
  6. II only
  7. I only
  8. I & III

Answer(s): C

Explanation:

The Capital Asset Pricing Model (CAPM), Discounted Cash Flow (DCF method), and Bond-Yield-plus- Risk- Premium methods may all be used to estimate a firm's Cost of Retained Earnings.



A project requires an initial outlay of 650. It also needs capital spending of 700 at the end of year 1 and 900 at the end of year 2. It has no revenues for the first 2 years but receives 1,200 in year 3, 1,600 in year 4 and 2,300 in year 5. The project's cost of capital is 10%. The project's NPV equals ________.

  1. $2,043
  2. $1,938
  3. $1,428
  4. $1,393

Answer(s): D

Explanation:

The discounted cash flow at the end of year N is obtained by dividing that year's cash flow by 1.1N, since the project's cost of capital is 10%. Using this, the discounted cash flows are:
-636, -744, +902, +1,093, +1,428.
The Present value of the cash flows is = -636 - 744 + 902 + 1,093 + 1,428 = $2,043. The net present value of the project = $(2,043 - 650) = $1,393.



The Target Copy Company is contemplating the replacement of its old printing machine with a new model costing $60,000. The old machine, which originally cost $40,000, has 6 years of expected life remaining and a current book value of $30,000 versus a current market value of $24,000. Target's corporate tax rate is 40 percent. If Target sells the old machine at market value, what is the initial after tax outlay for the new printing machine?

  1. -$22,180
  2. -$36,000
  3. -$30,000
  4. -$33,600
  5. -$40,000

Answer(s): D

Explanation:

Initial outlay
Cost of new machine-$60,000
Salvage value (old)+ 24,000
Tax effect of sale = $6,000(0.4) = + 2,400
After-tax outlay =-$33,600



The date on which a firm's directors issue a statement declaring a dividend is known as ________.

  1. Ex-Dividend Date
  2. Declaration Date
  3. Payment Date
  4. Dividend Date
  5. Holder-of-Record Date

Answer(s): B

Explanation:

The date on which a statement is issued by a firm's directors declaring a dividend is known as the "Declaration Date."



Proponents of which of the following theories would claim that companies seek to balance the tax shelter benefits of debt financing with the increased interest rates and risk of bankruptcy that come with increased debt levels?

  1. Modigliani & Miller's "with-taxes" Theory of Capital Structure
  2. Bird-in-the-Hand Theory
  3. Modigliani & Miller's Theory of Capital Structure
  4. Tax Preference Theory
  5. Signaling Theory
  6. Trade-off Theory of Leverage

Answer(s): F

Explanation:

Trade-off Theory of Leverage
The Trade-off Theory of Leverage claims that firms will seek to balance the tax-shelter benefits of debt financing with the increased interest costs and risk of bankruptcy that come with increased debt levels. The Trade-off Theory of Leverage came about largely from criticisms raised against the Modigliani andMiller Theory of Capital Structure under the "with-taxes" assumption. M&M claimed that, under a restrictive set of assumptions, the value of firms would be maximized only when their capital structure is comprised of 100% debt. The Trade-off Theory of Leverage proposed a more realistic and moderate answer to the Capital Structure debate, and remains an important milestone in the field of Pure Finance.



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