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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 32 )

Updated On: 26-Jan-2026
Page 32 of 793
PDF with 3960 Questions

A mutual fund manager is examining the financial and operating condition of a Questron Media Corporation, and has discovered the following information.
Sales: $3,000,000
Fixed costs: $1,000,000
Variable costs: $300,000
Interest expense: $150,000
Tax rate: 35%
Weighted Average Cost of Capital: 14.75%
Beta coefficient: 1.66
Common shares outstanding: 1,321,000
Using this information, what are the earnings per share (EPS) for Questron Media?

  1. $1.26
  2. $1.47
  3. $0.66
  4. $0.76
  5. $0.78
  6. $0.89

Answer(s): D

Explanation:

The EPS figure is perhaps the single most popular term in the field of conventional equity investments. Any glance into financial media and business periodicals will undoubtedly uncover numerous instances in which the EPS figure is cited. While quite popular and useful, many investors and business professionals do not truly understand the mechanics behind the EPS calculation, and an investigation into the components of EPS figure is a valuable learning experience. The EPS calculation is found by the following equation: {EPS = [(Sales - Fixed Costs - Variable Costs - Interest Expense)(1 - Tax Rate)] / [# of Common Shares Outstanding]} Additionally, the EPS figure can be found by:
{EPS = [(EBIT - Interest Expense)(1 - Tax Rate) / # of Common Shares Outstanding]} Incorporating the given information into the first EPS equation will yield the following: {EPS = [($3,000,000 - $1,000,000 - $300,000 - $150,000)(1 - 0.35)] / 1,321,000} = $0.7627



Monte Carlo simulation

  1. All of the answers are correct.
  2. Is capable of using probability distributions for variables as input data instead of a single numerical estimate for each variable.
  3. Produces both an expected NPV (or IRR) and a measure of the riskiness of the NPV or IRR.
  4. None of the answers are correct.
  5. Can be useful for estimating a project's stand-alone risk.

Answer(s): A

Explanation:

These are all true.



Dick Boe Enterprises, an all-equity firm, has a corporate beta coefficient of 1.5. The financial manager is evaluating a project with an IRR of 21 percent, before any risk adjustment. The risk-free rate is 10 percent, and the required rate of return on the market is 16 percent. The project being evaluated is riskier than Boe's average project, in terms of both beta risk and total risk. Which of the following statements is most correct?

  1. Riskier-than-average projects should have their IRRs increased to reflect their added riskiness. Clearly, this would make the project acceptable regardless of the amount of the adjustment.
  2. The accept/reject decision depends on the risk-adjustment policy of the firm. If the firm's policy were to reduce a riskier-than-average project's IRR by 1 percentage point, then the project should be accepted.
  3. The project should be accepted since its IRR (before risk adjustment) is greater than its required return.
  4. The project should be rejected since its IRR (before risk adjustment) is less than it's required return.
  5. Projects should be evaluated on the basis of their total risk alone. Thus, there is insufficient information in the problem to make an accept/reject decision.

Answer(s): B

Explanation:

k(s) = 10% + (16% - 10%)1.5 = 10% + 9% = 19%.
Original IRR = 21%. 21% - Risk adjustment 1% = 20%.
Risk adjusted IRR = 20% > k(s) = 19%.



Despite relative congruence in their ranking methods, NPV and MIRR will sometimes produce conflicting answers. Which of the following correctly illustrates an example in which the two methods would likely produce conflicting rankings?

  1. When examining projects with non-normal cash flows
    II. When examining projects that differ substantially in scale III. When examining independent projects
    IV. When examining projects that differ substantially in their lifespan
  2. I and III
  3. I and II
  4. II and IV
  5. II and IV

Answer(s): C

Explanation:

While the MIRR method is designed to tackle many of the problems associated with the traditional IRR calculation, there exist situations in which the MIRR will produce rankings which conflict with those produced by the NPV method. Specifically, when mutually-exclusive projects whose lifespans or scale differ substantially are being examined. In these situations, the NPV calculation should be relied on, as this method is considered to produce the correct results.



A mutual fund has a load of 4 percent and a net asset value (NAV) of $20 per share. What must an investor pay to purchase 250 shares?

  1. $5,200.
  2. $4,800.
  3. $5,013.
  4. $5,208.

Answer(s): D

Explanation:



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