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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 60 )

Updated On: 26-Jan-2026
Page 60 of 793
PDF with 3960 Questions

Which of the following statements is most correct?

  1. If a firm repurchases its stock in the open market, the shareholders that tender are subject to capital gains taxes.
  2. All of the statements are correct.
  3. None of these statements are correct.
  4. If you own 100 shares in a company's stock, and the company does a 2 for 1 stock split, you will own 200 shares in the company following the split.
  5. Some dividend reinvestment plans increase the amount of equity capital available to the firm.

Answer(s): B

Explanation:

Tendering (selling) shares in the open market is a taxable event. With the stock split, you will own twice the shares but the stock price will be halved. Dividend reinvestment plans permit stockholders to automatically reinvest their dividends in the stock of the paying firm. The new stock type of DRIPs invests the dividends in newly issued stock, hence these plans raise new capital for the firm.



Intelligent Semiconductor is considering issuing additional common stock. The firm has an after-tax cost of debt of 8.55%, and the company's combined federal/state income tax is 35%. The risk-free rate of return is 5.6%,

and the annual return on the broadest market index is expected to be 13.5%. Shares of Intelligent Semiconductor have a historical beta of 1.6. What is the cost of equity for this proposed common stock issue using the Capital Asset Pricing Model?

  1. 18.24%
  2. 4.09%
  3. 12.64%
  4. 7.04%
  5. 5.56%

Answer(s): A

Explanation:

The cost of issuing common stock can be calculated using several methods, including the Bond-Yield- Plus- Risk-Premium approach, Discounted Cash Flow method, or by using the Capital Asset Pricing Model. The latter is illustrated in this example. To calculate the cost of common equity using the CAPM, use the following formula: {cost of common equity = [risk free rate of return + beta(expected return on the market - risk free rate of return)}. Incorporating the appropriate figures into this example will yield a cost of common equity at 18.24%.



Given the following information, what is the required cash outflow associated with the acquisition of a new machine; that is, in a project analysis, what is the cash outflow at t = 0? Purchase price of new machine $8,000
Installation charge 2,000
Market value of old machine 2,000
Book value of old machine 1,000
Inventory decrease if new machine
is installed 1,000
Accounts payable increase if new
machine is installed 500
Tax rate 35%
Cost of capital 15%

  1. -$6,460
  2. -$8,980
  3. -$12,020
  4. -$5,200
  5. -$6,850

Answer(s): E

Explanation:

Cost plus installation($10,000)
Sale of old machine+2,000
Tax effect of sale ($1,000 x 0.34)(350)
Decrease in working capital1,500
Total investment at t = 0($6,850)



Los Angeles Lumber Company (LALC) is considering a project with a cost of $1,000 at time = 0 and inflows of $300 at the end of Years 1 - 5. LALC's cost of capital is 10 percent. What is the project's modified IRR (MIRR)?

  1. 15.2%
  2. 12.9%
  3. 20.7%
  4. 10.0%
  5. 18.3%

Answer(s): B

Explanation:

Tabular/Numerical solution:
TV = $300(FVIFA(10%,5)) = $300(6.1051) = $1,831.53.
$1,000 = TV/(1 + MIRR)^5
$1,000 = $1,831.53/(1 + MIRR)^5
(1 + MIRR)^5 = 1.83153
MIRR = 12.866%.



The degree of financial leverage is defined as:

  1. the change in EPS for a unit change in EBIT.
  2. the percentage change in EBIT for a 1% change in EPS.
  3. none of these answers.
  4. the percentage change in EBIT for a 1% change in the quantity sold.

Answer(s): C

Explanation:

The degree of financial leverage is defined as the percentage change in EPS for a 1% change in EBIT.



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