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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 40 )

Updated On: 26-Jan-2026
Page 40 of 793
PDF with 3960 Questions

The Global Advertising Company had net income after interest but before taxes of $40,000 this year. The marginal tax rate is 40 percent, and the dividend payout ratio is 30 percent. The company can raise debt at a 12 percent interest rate. The last dividend paid by Global was $0.90. Global's common stock is selling for $8.59 per share, and its expected growth rate in earnings and dividends is 5 percent. If Global issues new common stock, the flotation cost incurred will be 10 percent. Global plans to finance all capital expenditures with 30 percent debt and 70 percent equity. What is the cost of common equity raised by selling new stock?

  1. 10.33%
  2. 12.22%
  3. 16.00%
  4. 17.22%
  5. 9.66%

Answer(s): D

Explanation:

k(e) (component cost of external equity) = $.945/$8.59 (1-.10) + 0.05 = 0.1722 = 17.22%.



Which of the following statements is most correct?

  1. If Congress cuts the capital gains rate, but leaves the personal tax rate unchanged, then this would provide an incentive for companies to increase their dividend payouts.
  2. If a firm follows a residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm's dividend payout.
  3. None of these answers are correct.
  4. Despite its drawbacks, a residual dividend policy is an effective way to stabilize dividend payouts, which makes it easier for firms to attract a clientele which prefers high dividends.
  5. All of these answers are correct.

Answer(s): B

Explanation:

The residual dividend model is a model in which the dividend paid is set equal to the actual earnings minus the amount of retained earnings necessary to finance the firm's optimal capital budget. Ther esidual dividend policy minimizes the costs to the company of raising outside funds, but it does not provide a stable cash flow to the investors and most investors prefer stable dividends.



Which of the following statements is most correct?

  1. If a company undertakes a 3-for-1 stock split, then the number of shares outstanding should fall, and the stock price should rise.
  2. All of these answers are correct.
  3. None of these answers are correct.
  4. If a company wants to issue new shares of common stock and also wants to implement a dividend reinvestment plan, then it should implement a new-stock dividend reinvestment plan, rather than an open- market purchase plan.
  5. If a company wants to reduce its debt ratio, then it should repurchase some of its common stock.

Answer(s): D

Explanation:

The new stock type of dividend reinvestment plan invests the dividends in newly issued stock, hence these plans raise new capital for the firm.



McCarver Inc. is considering the following mutually exclusive projects:
Project A Project B
TimeCash FlowCash Flow
0-$5,000-$5,000
1200 3,000
2800 3,000
33,000 800
45,000 200
At what cost of capital will the net present value of the two projects be the same?

  1. 16.15%
  2. 17.72%
  3. 17.80%
  4. 15.68%
  5. 16.25%

Answer(s): A

Explanation:

Find the differences between the two projects' respective cash flows as follows:
(Project A CF - Project B CF).
CF(0) = -5,000 - (-5,000) = 0.
CF(1) = 200 - 3,000 = -2,800.
CF(2) = -2,200.
CF(3) = 2,200.
CF(4) = 4,800.
Enter these CFs and find the IRR = 16.15% which is the crossover rate.



Clay Industries, a large industrial firm, is evaluating the sales of its existing line of coiled machine tubing. In their analysis, the operating managers of Clay Industries have identified the following information related to the coiled machine tubing division and its product:
Annual fixed operating expenses of $925,000
Average selling price of $90
Average variable cost of $44
Which of the following best describes the break-even quantity for this product?

  1. 20,109 units
  2. The break-even quantity cannot be determined from the information provided.
  3. None of these answers is correct.
  4. 20,468 units
  5. 10,278 units
  6. 21,023 units

Answer(s): A

Explanation:

To calculate the break-even quantity for a product, use the following equation: {Fixed operating costs/[avg.
sales price per unit - variable cost per unit]}. The determination of the break-even quantity for this product is relatively straightforward, and does not involve any algebraic manipulation of the original equation.
Incorporating the given information into the equation yields the following: {$925,000/[$90 - $44]} = 20,109 units.



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