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 75 )

Updated On: 26-Jan-2026
Page 75 of 793
PDF with 3960 Questions

Consider the following information:
Borrowing Rate 10%
Marginal Tax Rate 40%
Preferred Stock Par Price $50
Preferred Dividend $5
Preferred Stock floatation cost 2.0%
Cost of common equity 15.0%
Preferred Stock issued at Par
The Optimal Capital Structure is 45% debt, 50% common equity, and 5% preferred stock. Credit Rating BB+ What is the firm's Weighted Average Cost of Capital (WACC)?

  1. 9.0%
  2. 7.14%
  3. 9.06%
  4. 10.71%
  5. 2.5%
  6. 28.00%

Answer(s): D

Explanation:

The firm's Weighted Average Cost of Capital (WACC) is a weighted average of the component cost of capital.
In this case 10%(borrowing rate) x (1-.4)Tax savings = 6% is the component cost of debt. $5 (preferred dividend) / 49(Par minus floatation cost) = 10.2% is the component cost of preferred stock. Thus the WACC = .45(6%) + .5(15%) + .05(10.2%) = 10.71%



Which of the following is/are true for a project which needs only an initial outlay and no further expenses?

  1. The shorter the payback period, the greater the liquidity of the project.
    II. The discounted payback period is always more than the simple payback period.
    III. The payback period rule considers all the cash flows involved in a project.
  2. II & III
  3. II only
  4. I & II
  5. III only
  6. I & III
  7. I only
  8. I, II & III

Answer(s): C

Explanation:

The payback period measures how quickly you recover your initial investment. The shorter this period, the greater the liquidity in terms of cash recovery. The payback rule ignores cash flows beyond the payback period.
The discounted payback period is defined as the expected number of years that would be required to recover the original investment using discounted cash flows. Hence, (II) is true if there are no negative cash flows after the initial investment since discounting reduces the present value of the future cash flows.



Which of the following statements is correct?

  1. When the MCC (Marginal Cost of Capital) schedule is developed, the first break point always occurs as a result of using up retained earnings.
  2. Flotation costs must be included in the component cost of preferred stock.
  3. If a company with a debt ratio of 50 percent were suddenly exempted from all future income taxes, then, all other things held constant, this would cause its WACC to increase.
  4. The WACC (Weighted Average Cost of Capital) should include only after-tax component costs. Therefore, the required rates of return on debt, preferred, and common equity must be adjusted to an after-tax basis before they are used in the WACC equation.
  5. The cost of retained earnings is generally higher than the cost of new common stock.

Answer(s): C

Explanation:

If a firm paid no income taxes, its cost of debt would not be adjusted downward, hence the component cost of debt would be higher than if T (the firm's marginal tax rate) were greater than 0. With a higher component cost of debt, the WACC would be increased. Of course, the company would have higher earnings, and its cash flows from a given project would be high, so the higher WACC would not impede its investments, i.e., its capital budget would be larger than if it were taxed.



Firmica recently bought a fleet of trucks which fall in the 5-year MACRS class for $135,000, with an additional $10,000 for shipping, minor taxes and paperwork. The trucks are expected to last for 7 years and have a total salvage value of $25,620. The recovery allowance for year 1 in the 5-year MACRS class is 20% and in the second year, it is 32%. In the second year, the depreciation expense arising from the fleet equals ________.

  1. $46,400
  2. $34,560
  3. $43,200
  4. $37,120

Answer(s): A

Explanation:

You should remember four things about MACRS:
1. Salvage value is never considered in calculating the depreciable basis.
2. The depreciable basis equals the purchase price plus all shipping and installation costs. 3. The depreciable basis does not change over the life of the asset in question.
4. Depreciation expense for any given year equals the allowed recovery percentage in that MACRS class times the depreciable basis.
Therefore, in this case, the depreciable basis equals $135,000 + $10,000 = $145,000 and the year 2 depreciation equals $145,000*32% = $46,400.



An individual investor approaches you and asks, "If I were to purchase a fund with a load of 6 percent, and I used $6,200 to purchase the fund, what dollar amount would the shares purchased be?"

  1. $6,200.
  2. $5,828.
  3. $6,572.
  4. $372.

Answer(s): B

Explanation:

6,200 x .94 = 5,828



Viewing page 75 of 793
Viewing questions 371 - 375 out of 3960 questions



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

Join the CFA I Discussion