Cisco
CompTIA
ISC
EC-Council
EXIN
Fortinet
ITIL
Juniper
Microsoft
VMware
Avaya
SAP
Google
NVIDIA
Salesforce
Amazon
Palo Alto Networks
ISC2
Splunk
ServiceNow
All Vendors
  2. Home
  3. Exams
  4. CFA
  5. CFA I

CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 72 )

Updated On: 26-Jan-2026
Page 72 of 793
PDF with 3960 Questions

Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock, which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Rollins is a constant growth firm, which just paid a dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk- premium method to find k(s). The firm's net income is expected to be $1 million, and its dividend payout ratio is 40 percent. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 40 percent. What is Rollins' WACC once it starts using new common stock financing?

  1. 16.6%
  2. 13.6%
  3. 14.1%
  4. 16.9%
  5. 16.0%

Answer(s): C

Explanation:

k(e) = $2.16/ $27.00(1-.10) + 0.08 = 0.08889 + 0.08 = 0.169 = 16.9%.
WACC = 0.2(12.0%)(0.6) + 0.2(12.6%) + 0.6(16.9%) = 14.1%.



Intelligent Semiconductor, a diversified technology company, is evaluating the sales of its cadmium silicon transistor coils, and has identified the following information:
Fixed production costs for these transistors: $750,000
Average sales price per unit: $405.00
Variable cost per unit: $313.60
Which of the following best describes the breakeven quantity for this product?

  1. The breakeven quantity for this product cannot be determined from the information provided.
  2. 8,206 units
  3. 1,044 units
  4. 5,397 units
  5. 7,397 units

Answer(s): B

Explanation:

To calculate the breakeven quantity for a product, use the following equation: {Fixed operating costs/[avg. sales price per unit - variable cost per unit]}. Incorporating the given information into this equation yields the following:
{$750,000/[$405 - $313.60]}=8,206 units.



The optimal debt ratio is the debt ratio that:

  1. minimizes the firm's bankruptcy costs.
  2. maximizes the firm's earnings per share and maximizes the firm's stock price.
  3. maximizes the firm's stock price.
  4. maximizes the firm's earnings per share.

Answer(s): C

Explanation:

The optimal debt ratio is defined as the debt level that maximizes the firm's stock price.



A cash outlay that has already been incurred and which cannot be recovered regardless of whether the project is accepted or rejected is known as which of the following terms?

  1. Incremental Cash Flow
  2. Externality
  3. Sunk Cost
  4. Opportunity Cost
  5. Cannibalization

Answer(s): C

Explanation:

Sunk cost is defined as a cash outlay that has already been incurred and which cannot be recovered regardless of whether a project is accepted or rejected.



The management of Intelligent Semiconductor is examining the asset structure of its superconductor division, and has ascertained the following annual financial information: Invoiced sales $6,850.000 EBITA $3,525,000
Interest expense $150,000
Amortization expense $245,000
Given this information, which of the following best characterizes the Degree of Financial Leverage for this division?

  1. 1.048
  2. None of these answers is correct.
  3. 1.044
  4. .0.488
  5. 2.03

Answer(s): A

Explanation:

To calculate the DFL, the financial analyst needs to determine the EBIT and interest paid for a predetermined time period. To calculate the Degree of Financial Leverage, the following equation is used: {EBIT/[EBIT - interest paid]}. In this example, EBITA is provided rather than EBIT. Thankfully, however, a figure is given for amortization expense. To determine the EBIT, subtract the amortization expense from then EBITA figure, which gives a figure of $3,280,000 for the EBIT. The next step is to incorporate the given information into the DFL equation as follows: {EBIT $3,280,000 / [EBIT $3,280,000 - interest expense $150,000]}=1.048 The Degree of Financial Leverage measures the percentage change in EPS which results from a given percentage change in EBIT. Remember that any preferred stock dividends must be incorporated into the DFL calculation, and that the DFL can never be less than one.



Viewing page 72 of 793
Viewing questions 356 - 360 out of 3960 questions



Post your Comments and Discuss CFA CFA I exam prep with other Community members:

Join the CFA I Discussion