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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 65 )

Updated On: 26-Jan-2026
Page 65 of 793
PDF with 3960 Questions

The management of Intelligent Semiconductor is considering the creation of a new manufacturing facility. The following information applies to the new facility:
Initial investment outlay: ($50,200,000)
t1: ($3,000,000)
t2: ($1,500,000)
t3: $12,000,000
t4: $20,000,000
t5: $25,000,000
t6: $25,000,000
t7: $20,000,000
t8: ($1,500,000)
t9: ($3,000,000)
t10: $500,000
Assuming a 15% discount rate, along with a $0.00 salvage value at the end of year 10, what is the Modified Internal Rate of Return for this project?

  1. 13.19%
  2. 9.88%
  3. 12.66%
  4. 14.61%
  5. 13.90%
  6. Because this is a non-normal project, the Modified Internal Rate of Return cannot be calculated.

Answer(s): E

Explanation:

Remember that the Modified Internal Rate of Return escapes many of the pitfalls associated with the traditional Internal Rate of Return calculation. One such pitfall is the fact that the traditional IRR cannot produce reliable calculations for "non-normal" projects, such as the project illustrated in this example. The Modified Internal Rate of Return, however, escapes this basic flaw and can be used to evaluate virtually any project. The calculation of the answer in this example is as follows:
Step 1: Determine the Future Value of the cash inflows by compounding each positive inflow by the cost of capital. This value is often referred to as the "Terminal Value." Remember that in this example, the positive cash inflows begin at period 3.
Step 2: Determine the Present Value of the cash outflows by discounting each negative inflow by the cost of capital. The cash inflows to be discounted occur in periods 1, 2, 8, and 9.
Step 3: Determine the rate that equates the PV of the cash outflows to the FV of the cash inflows. The calculation of the FV of the cash inflows is shown as follows:
FV of the cash inflows = {[$12,000,000 * 2.660] + [$20,000,000 * 2.313] + [$25,000,000 * 2.011] + [$25,000,000
* 1.749] + [$20,000,000 * 1.521] + [$500,000 * 1]} = $203,100,000.
This is the terminal value.
The calculation of the PV of the cash outflows is calculated as follows:
PV of the cash outflows = {$50,200,000 + [$3,000,000 / 1.15] + [$1,500,000 /1.323] + [$1,500,000 / 3.059] + [$3,000,000 / 3.518]} = $55,285,596.07
Now that the present and future (terminal) values of the cash flows have been determined, the Modified Internal Rate of Return can take place. The following values are imputed into the Present Value worksheet on your calculator:
PV =($55,285,596), FV = $203,100,000, N = 10, PMT = $0.00, Compute I. Imputing these values will yield an answer of 13.896% for the Modified Internal Rate of Return.



A firm has issued a perpetuity with a total face value of 100 million dollars and a coupon rate of 5.8%. If the risk free rate equals 5.8% and investors require a rate of return of 10.6% from the perpetuity, what's the amount the firm raised through the issue?

  1. $55.28 million
  2. none of these answers
  3. $100 million
  4. $54.72 million

Answer(s): D

Explanation:

The price of a perpetuity that pays C per year, at a discount rate of R, equals C/R. Hence, the price of the perpetuity issue = $(100*5.8%/10.6% ) million = $54.72 million.



Merryweather, a manufacturer of summer casual wear, has a return on equity of about 10.6%. It typically pays out about 27% of its earnings as dividends. The firm's stock has a beta of +0.23. The market has an expected return of 16.2% and the prevailing risk-free rate is 6.9%. Merryweather recently announced that last year's EPS was $4.3 per share. Given these data, Merryweather's share price should be:

  1. $91.19
  2. $84.84
  3. $96.07
  4. $78.29

Answer(s): C

Explanation:

The dividend growth rate, g = ROE*(1-payout ratio) = 0.106*(1-0.27) = 7.738%.
The dividend this year was 4.3*0.27 = $1.16. Therefore, expected dividend next year = D1 = (1+g)*Do = 1.07738*1.16 = $1.25.
The required rate of return on the stock can be found using CAPM, which gives Rstock = Rf + beta*(Rm - Rf) = 6.9% + 0.23*(16.2% - 6.9%) = 9.039%.
Therefore, Po = D1/(k-g) = 1.25/(9.039% - 7.738%) = $96.07.



Which of the following statements is correct?

  1. It is unrealistic to expect that increases in net working capital that are required at the start of an expansion project are simply recovered at the project's completion. Thus, these cash flows are included only at the start of a project.
  2. Equipment sold for more than its book value at the end of a project's life will increase income and, despite increasing taxes, will generate a greater cash flow than if the same asset is sold at book value.
  3. All of these statements are false.
  4. An asset that is sold for less than book value at the end of a project's life will generate a loss for the firm and will cause an actual cash outflow attributable to the project.
  5. Only incremental cash flows are relevant in project analysis and the proper incremental cash flows are the reported accounting profits because they form the true basis for investor and managerial decisions.

Answer(s): B

Explanation:

A gain on the sale occurs when equipment is sold for more than its book value. This increases profit and cash flow.



Which of the following is/are true about the DOL?

  1. The DOL measures the change in EBIT for a given change in the quantity sold.
    II. The DOL is zero at the break-even level.
    III. The DOL decreases as the level of sales increases.
  2. I only
  3. II & III
  4. I, II & III
  5. III only
  6. II only

Answer(s): D

Explanation:

The DOL measures the percentage change in EBIT for a given percentage change in the quantity sold. At a sales level of Q units, DOL = Q(P-V)/[Q(P-V) - FC] Hence, at the break-even level, the DOL is infinite but decreases as the sales increase.



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