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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 45 )

Updated On: 26-Jan-2026
Page 45 of 793
PDF with 3960 Questions

Which of the following statements is correct?

  1. If you are choosing between two projects which have the same life, and if their NPV profiles cross, then the smaller project will probably be the one with the steeper NPV profile.
  2. If the cost of capital is relatively high, this will favor larger, longer-term projects over smaller, shorter term alternatives because it is good to earn high rates on larger amounts over longer periods.
  3. If the cost of capital is less than the crossover rate for two mutually exclusive projects' NPV profiles, a NPV/ IRR conflict will not occur.
  4. Because discounted payback takes account of the cost of capital, a project's discounted payback is normally shorter than its regular payback.
  5. The NPV and IRR methods use the same basic equation, but in the NPV method the discount rate is specified and the equation is solved for NPV, while in the IRR method the NPV is set equal to zero and the discount rate is found.

Answer(s): E

Explanation:

This statement reflects exactly the difference between the NPV and IRR methods.



Market risk in a revenue-producing project can best be adjusted for by

  1. Ignoring it.
  2. Adjusting the discount rate downward for increasing risk.
  3. Picking a risk factor equal to the average discount rate.
  4. Adjusting the discount rate upward for increasing risk.
  5. Reducing the NPV by 10 percent for risky projects.

Answer(s): D

Explanation:

An increase in a project's beta will cause its stock price to decrease unless the increased beta were offset by a higher expected rate of return. Therefore, high-risk investments require higher rates of return, whereas low-risk investments require lower rates of return.



Which of the following figures is not expressly incorporated into the Degree of Operating Leverage, as based on the "unit sales" calculation.

  1. Average sales price
  2. Total variable operating costs per unit
  3. Price
  4. Common shares outstanding
  5. Total fixed operating costs
  6. Sales in units

Answer(s): D

Explanation:

The Degree of Operating Leverage (DOL) measures the percentage change in EBIT that results from a given change in sales. The DOL can be calculated using several methods, including one that is based on unit sales.
This version of the DOL equation is as follows: {DOL = [(Sales in units(average sales price - variable cost per unit) / (sales in units(average sales price - variable cost per unit) - total fixed operating costs]}. Of the choices listed, only the number of common shares outstanding is not incorporated into the DTL equation. In fact, the number of common shares outstanding is not factored into any of the equations used to calculate DOL.



The additional risk associated with a firm's earnings when it uses debt capital is known as

  1. business risk.
  2. systematic risk.
  3. capital market risk.
  4. financial risk.

Answer(s): D

Explanation:

Financial risk is the additional risk associated with a firm's earnings when it uses debt capital.



Which of the following statements is most incorrect?

  1. All of these answers are correct.
  2. If the after-tax cost of equity financing exceeds the after-tax cost of debt financing, firms are always able to reduce their WACC by increasing the amount of debt in their capital structure.
  3. The optimal capital structure minimizes the WAC
  4. None of these answers are correct.
  5. Increasing the amount of debt in a firm's capital structure is likely to increase the cost of both debt and equity financing.

Answer(s): B

Explanation:

This statement is not always true.



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