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 73 )

Updated On: 26-Jan-2026
Page 73 of 793
PDF with 3960 Questions

Sunk costs:

  1. should be ignored while evaluating a project.
  2. affect a project's desirability adversely.
  3. are incremental cash flows of the project under consideration.
  4. lower a project's NPV.

Answer(s): A

Explanation:

Sunk costs represent expenses that have already been incurred or committed to. Therefore, they are not pertinent to future decisions.



Becker Glass Corporation expects to have earnings before interest and taxes during the coming year of $1,000,000, and it expects its earnings and dividends to grow indefinitely at a constant annual rate of 12.5 percent. The firm has $5,000,000 of debt outstanding bearing a coupon interest rate of 8 percent, and it has 100,000 shares of common stock outstanding. Historically, Becker has paid 50 percent of net earnings to common shareholders in the form of dividends. The current price of Becker's common stock is $40, but it would incur a 10 percent flotation cost if it were to sell new stock. The firm's tax rate is 40 percent. What is Becker's cost of newly issued stock?

  1. 17.5%
  2. 16.5%
  3. 16.0%
  4. 17.0%
  5. 18.0%

Answer(s): A

Explanation:

Cost of new common equity:
k(e) = $1.80/$40.00(1-.10) + 0.125 = 17.5%.
The dividend of $1.80 was derived by:
EBIT$1,000,000
Interest 400,000
EBT$600,000
Taxes (40%)240,000
Net income$360,000
EPS(1) = $360,000/100,000 = $3.60.
D(1) = $3.60(0.5) = $1.80.



Which of the following statements is most correct?

  1. None of the answers are correct.
  2. All is these answers are correct.
  3. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
  4. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the cost of capital.
  5. If a project's internal rate of return (IRR) exceeds the cost of capital, then the project's net present value (NPV) must be positive.

Answer(s): E

Explanation:

The IRR on a project is its expected rate of return. If the return exceeds the cost of the funds used to finance the project, a surplus remains after paying for the capital, and this surplus accrues to the firm's stockholders.
Therefore, a project whose IRR exceeds its cost of capital increase shareholders' wealth, just as a positive NPV does.



The management of Microscam International, a large software manufacturer, is examining its capital structure. The firm is financed according to the following schedule based on market values:
40% debt
50% common stock
10% perpetual preferred stock
Additionally, consider the following information:
Yield on outstanding debt: 9.25%
Tax rate: 35%

Annual preferred dividend: $2.02
Preferred stock price: $17.44
Return on equity: 22%
Dividend payout ratio: 15%
Cost of common stock: 15.40%
Using this information, what is the Weighted Average Cost of Capital for Microscam?

  1. 11.08%
  2. 11.12%
  3. None of these answers.
  4. 10.88%
  5. 11.26%
  6. The answer cannot be completely calculated from the given information.

Answer(s): E

Explanation:

In order to calculate the WACC, it is necessary to first calculate the component after-tax cost of debt, common equity, and preferred equity. Once the cost of these components is determined, they are imputed into the WACC equation, which is as follows:
{WACC = [(% weight of debt securities * cost of debt) + (% weight of common stock * cost of common stock) + (% weight of preferred stock * cost of preferred stock)]}
To calculate the component cost of debt, use the following equation: {After-tax cost of debt = [yield on outstanding debt securities * (1 - tax rate)}
Factoring in the given information into this equation would yield the following:
{After-tax cost of debt = [9.25% * (1 - 0.35%)]} = 6.013%
To calculate the component cost of outstanding preferred stock, the following equation must be used:
{Cost of preferred stock = [annual dividend / preferred stock price]} {Cost of preferred stock - = [$2.02 / $17.44]} = 11.58%.
The final component of the WACC calculation, the cost of common equity, has been provided as 15.40%.
Now that the after-tax cost of debt, preferred stock, and common stock have been determined, the WACC calculation can be found. The calculation of the WACC is as follows: {[0.40 * 0.06013] + [0.50 * 0.1540] + [0.10
* 0.1158]} = 11.263%.



Firm A has just paid a cash dividend of $6.2 per share. If the growth rate is expected to be 6% and the price of the stock is $24.90, the expected return on the stock is:

  1. 32.39%
  2. 26.39%
  3. 20.39%
  4. 24.90%

Answer(s): A

Explanation:

Po = D1/(k-g). In this case, g = 6%, D1 = Do*(1+g) = 6.2*1.06 = $6.572 and Po = $24.90. Therefore, k = 32.39%. Note that Brigham & Houston refer to k as the cost of retained earnings; this is the same as the expected rate of return demanded by shareholders, which is the same as the rate of return on common equity.



Viewing page 73 of 793
Viewing questions 361 - 365 out of 3960 questions



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

Join the CFA I Discussion