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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 43 )

Updated On: 26-Jan-2026
Page 43 of 793
PDF with 3960 Questions

Consider the following information for Company ABC:
Current Price of Stock $40.25
Expected dividend in 1 Year $1.10
Growth rate 9.2%
Beta 1.2
Risk Free Rate 4.5%
Expected Market Return 10%
Calculate this company's cost of retained earnings using the Discounted Cash Flow (DCF) method.

  1. 13.70%
  2. 11.93%
  3. 12.0%
  4. 9.20%
  5. 13.30%
  6. 11.04%

Answer(s): B

Explanation:

The DCF method for estimating the cost of retained earnings states: Cost of Retained Earnings = (Dividend for period 1 / Current Price) + Growth Rate. In this case the estimated Cost of Retained Earnings = (1.1 / 40.25) + 9.2% = 2.73 + 9.2 = 11.93%



Project A has a higher IRR than project B. Both projects have normal cash flows. If the projects have the same cost of capital which is greater than the crossover rate,

  1. Project A has a higher NPV.
  2. Both projects have the same NPV.
  3. Project B has a higher NPV.
  4. Insufficient information.

Answer(s): A

Explanation:

The crossover rate is the discount rate at which the graphs of NPV versus discount rate for the two projects cross. Since the projects have normal cash flows, they will have a single crossover rate. Further, the project with the higher IRR has a "flatter" NPV profile. Therefore, if the cost of capital is larger than the crossover rate, the project with the flatter profile will have a larger NPV.



Steadybeta currently operates 3 projects, resulting in a beta of 1.27. It is considering a risky expansion project whose cash flow analysis indicates a beta of 2.3. The project requires a capital commitment of $4.8 million and has an NPV of $2 million. The current risk-free rate is 5.6% and the market risk premium is 8.9%. Steadybeta's current market capitalization is $17.2 million. If Steadybeta undertook the project, the required rate of return expected by its shareholders will be:

  1. 14.8%
  2. 13.9%
  3. 19.5%
  4. 16.2%

Answer(s): C

Explanation:

19.5% The firm can be considered a portfolio of 4 projects. The beta of a portfolio equals the weighted average of the betas of the individual components. The weight of a component equals the fraction of the market value it comprises. Since the project has an NPV of $2 million, its market value equals $6.8 million and the market value after the project is undertaken will be $(17.2+6.8) = $24 million. Therefore, the beta of the firm after it undertakes the project equals 17.2/24*1.27 + 6.8/24*2.3 = 1.56. The required rate of return then equals 5.6% + 1.56*8.9% = 19.5%.



Which of the following is the correct chronological order in dividend payment procedures?

  1. Declaration date, record date, ex dividend date, dividend payment date.
  2. Declaration date, dividend payment date, record date, ex dividend date.
  3. Declaration date, ex dividend date, record date, dividend payment date.
  4. Declaration date, ex dividend date, dividend payment date, record date.

Answer(s): C

Explanation:

In the U.S., the ex dividend date, i.e. the date after which the stock does not carry with it the right to receive the declared dividend, is 4 business days before the record date. The record date is the last day for registering the ownership of the stock with the firm so that the dividend check is mailed to you and not someone else.



Which of the following statements is most correct?

  1. All of these statements are correct.
  2. Stockholders pay no income tax on dividends reinvested in a dividend reinvestment plan.
  3. Investors receiving stock dividends must pay taxes on the new shares at the time the stock dividends are received.
  4. None of these statements are correct.
  5. "New-stock" dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don't change the total equity of a firm.

Answer(s): D

Explanation:

Stock dividends are dividends paid in the form of additional shares of stock rather than in cash. The total number of shares is increased, so earnings, dividends, and price per share all decline. In a dividend reinvestment plan, the stockholder must pay taxes on the dividend amount, even though stock and not cash has been received.



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