Cisco
CompTIA
ISC
EC-Council
EXIN
Fortinet
ITIL
Juniper
Microsoft
VMware
Avaya
SAP
Google
NVIDIA
Salesforce
Amazon
Palo Alto Networks
ISC2
Splunk
ServiceNow
All Vendors
  2. Home
  3. Exams
  4. CFA
  5. CFA I

CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 35 )

Updated On: 26-Jan-2026
Page 35 of 793
PDF with 3960 Questions

Daniel Tipton and Jesse Torrez are first-year MBA students at the Haas School of Business. Torrez has an economics background, but Tipton's background is in music. To help Tipton study one of the main tenets of competition theory, Torrez creates the following question and asks Tipton to identify the statement that is most inconsistent with Porter's five forces. Which statement should Tipton select?

  1. Supplier power is higher when there are only a few suppliers to an industry.
  2. To sustain above average returns on invested capital, firms should strive for economies of scale.
  3. Porter's five forces are: rivalry among current competitors, economies of scale, threat of substitutes, bargaining power of suppliers, and bargaining power of buyers.
  4. Rivalry increases when firms of equal size compete within an industry.

Answer(s): C

Explanation:

Porter's five forces are: rivalry among current competitors, threat of new entrants, threat of substitutes, bargaining power of suppliers, and bargaining power of buyers. Economies of scale are a way to lessen the threat of new entrants, but are not the only way to discourage competition. Companies can also have barriers to entry such as regulation or high start up capital. The other choices are true.



Consider the following information for Magical Interactions, Inc. Based on the assumptions above, which of the following statements is TRUE?

  1. The stock is undervalued.
  2. If the earnings retention rate increases, the value of the stock will increase (all else equal).
  3. If management can increase the EBITDA ratio by only 1.0%, the stock will be properly priced (all else equal).
  4. If inflation expectations decrease, the value of the stock will increase (all else equal).

Answer(s): D

Explanation:

The expected inflation rate is a component of ke (through the nominal risk free rate). ke is one component of the P/E ratio and can be represented by the following: nominal risk free rate + stock risk premium, where nominal risk free rate = [(1 + real risk free rate) * (1 + expected inflation rate)] ­ 1.
The other statements are false. To determine the stock over/under valuation, we need to calculate both the P/E ratio and the EPS.
The P/E ratio = Dividend Payout Ratio / (ke­ g),
EPS = [(Per share Sales Estimate) * (EBITDA%) ­ D (per share) ­ I (per share)] * (1 - t) = [($150 * 0.18) - $15 - $10] * (1 ­ 0.35) = $1.30
Value of stock = EPS * P/E = 7.14 * $1.30 =$9.30
Since the market value of the stock is greater than the estimated value, the stock is overvalued.
An increase in earnings retention will likely decrease the P/E ratio. The logic is as follows: Because earnings retention impacts both the numerator (dividend payout) and denominator (g) of the P/E ratio, the impact of a change in earnings retention depends upon the relationship of ke and ROE. If the company is earning a lower rate on new projects than the rate required by the market (ROE < ke), investors will likely prefer that the company pay dividends (absent tax concerns). Investors will likely value the company lower if it retains a higher percentage of earnings.
If management increases EBITDA by 1.0%,the stock will be undervalued.
EPS = [($150 * 0.19) - $15 - $10] * (1 ­ 0.35) = $2.28
Value of stock = EPS * P/E = 7.14 * $2.28 = approximately$16.30, which is greater than the market value.
Note: the EBITDA % that equates to the market price is approximately 18.5%, or a 0.5% increase. Small changes in EBITDA% have a large impact on the EPS and thus on the estimated stock value.



Assume an investor makes the following investments:
During year one, the stock paid a $5.00 per share dividend. In year 2, the stock paid a $7.50 per share dividend. The investor's required return is 35.0 percent.
The dollar-weighted return is:

  1. 48.9%.
  2. 16.1%.
  3. 46.5%.
  4. 102.4%.

Answer(s): A

Explanation:

To calculate the dollar-weighted return:
Step 1: Determine the timing and sign (inflow, outflow) of the cash flows Purchase share 2, $75.00 outflow
Received dividend from share 2, $7.50 inflow
Sell share 1, $100.00 inflow,
Sell share 2, $100.00 inflow.
Step 2: Calculate the net cash flows for each year (all amounts in $) Step 3: Use your financial calculator to solve for IRR (or use trial and error)






Duration of a bond normally increases with an increase in:

  1. time to maturity.
  2. coupon rate.
  3. yield to maturity.
  4. par value.

Answer(s): A

Explanation:

Duration is directly related to maturity and inversely related to the coupon rate and yield to maturity (YTM).
Duration is approximately equal to the point in years where the investor receives half of the present value of the bond's cash flows. Therefore, the later the cash flows are received, the greater the duration.
The longer the time to maturity, the greater the duration (and vice versa). A longer-term bond pays its cash flows later than a shorter-term bond, increasing the duration. The lower the coupon rate, the greater the duration (and vice versa). A lower coupon bond pays lower annual cash flows than a higher-coupon bond and thus has less influence on duration. The lower the YTM, the higher the duration. This is because the bond's price (or present value) is inversely related to interest rates. When market yields fall, the value (or cash flow) of a bond increases without increasing the time to maturity.
Consider the purchase of an existing bond selling for $1,150. This bond has 28 years to maturity, pays a 12 percent annual coupon, and is callable in 8 years for $1,100.



What is the bond's yield to call (YTC)?

  1. 10.05%.
  2. 9.26%.
  3. 10.34%.
  4. 10.55%.

Answer(s): A

Explanation:

N = 8, PMT = 120, PV = -1150, FV = 1100, CPT I/Y.



Viewing page 35 of 793
Viewing questions 171 - 175 out of 3960 questions



Post your Comments and Discuss CFA CFA I exam prep with other Community members:

Join the CFA I Discussion