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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 5 )

Updated On: 26-Jan-2026
Page 5 of 793
PDF with 3960 Questions

Maxvill Motors has annual sales of $15,000. Its variable costs equal 60 percent of its sales, and its fixed costs equal $1,000. If the company's sales increase 10 percent, what will be the percentage increase in the company's earnings before interest and taxes (EBIT)?

  1. 18%
  2. 20%
  3. 16%
  4. 12%
  5. 14%

Answer(s): D

Explanation:

First, find EBIT before sales increase:
EBIT = Sales - (Sales x VC%) - FC
= $15,000 - ($15,000 x 0.60) - $1,000
= $5,000.
Now, assuming sales increase by 10% or to $15,000 x 1.10 = $16,500, calculate the new EBIT. EBIT = $16,500
- ($16,500 x 0.60) - $1,000 = $5,600.
So, the percentage increase is [($5,600 - $5,000)/$5,000] x 100 = 12%.



Louisiana Enterprises, an all-equity firm, is considering a new capital investment. Analysis has indicated that the proposed investment has a beta of 0.5 and will generate an expected return of 7 percent. The firm currently has a required return of 10.75 percent and a beta of 1.25. The investment, if undertaken, will double the firm's

total assets. If k(RF) = 7 percent and the market return is 10 percent, should the firm undertake the investment?

  1. No; the expected return of the asset (7%) is less than the required return (8.5%).
  2. Yes; the expected return of the asset (7%) exceeds the required return (6.5%).
  3. Yes; the beta of the asset will reduce the risk of the firm.
  4. No; the risk of the asset (beta) will increase the firm's beta.
  5. No; the expected return of the asset is less than the firm's required return, which is 10.75%.

Answer(s): A

Explanation:

Calculate the required return and compare to the expected return.
k(s) = k(RF) + (k(M) - k(RF))b = 0.07 + (0.10 - 0.07)0.5 = 0.085 = 8.5%.
The expected return of the asset (7%) is less than the required return (8.5%) so the investment should not be made.



The process of planning expenditures on assets whose cash flows are expected to extend beyond one year is known as ________.

  1. Net Present Valuing
  2. Capital Budgeting
  3. Optimal Capital Structure
  4. Payback Period
  5. Weighted Average Cost of Capital (WACC)

Answer(s): B

Explanation:

Capital Budgeting is defined as the process of planning expenditures on assets whose cash flows are expected to extend beyond one year.



A portfolio manager with Mally, Feasance, & Company is examining shares of Melton Industries, a large industrial firm. Assume the following information:
Annual Dividend: $0.70
EPS: $1.65
Tax Rate: 35%
Discount Rate: 13.15%
ROE: 16%
Using this information, what is the expected growth rate of this firm? Assume that the discount rate, tax rate, and ROE are expected to remain stable.

  1. 11.59%
  2. 9.21%
  3. None of these answers
  4. 6.79%
  5. 6.00%
  6. 10.00%

Answer(s): B

Explanation:

To calculate the dividend growth rate, assuming a stable ROE figure, use the following equation: {g = ROE(1 - Dividend Payout Ratio)}. While the ROE figure has been provided, the Dividend Payout Ratio must be calculated manually. To find the Dividend Payout Ratio, divide the annual dividend by the EPS figure, giving the following: {Dividend Payout Ratio = ($0.70/$1.65)}. From this equation, we determine that the Dividend Payout Ratio for this firm is 42.42%. Imputing this figure into the Dividend Growth Rate Equation will yield a growth rate of 9.21% for this firm. As you can see, neither tax rates nor discount rates are incorporated into the calculation.



All else equal, which of the following is/are true about break-even point?

  1. An increase in the sale price per unit increases the break-even quantity.
    II. An increase in the variable cost per unit increases the break-even quantity.
    III. An increase in the fixed costs increases the break-even quantity.
  2. III only
  3. I & II
  4. I only
  5. II & III
  6. I, II & III
  7. II only
  8. I & III

Answer(s): D

Explanation:

The break-even quantity is the number of units that must be sold to just cover the fixed and variable costs. An increase in revenues per unit will decrease the break-even quantity while an increase in costs per unit will increase the break-even quantity.



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