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 77 )

Updated On: 26-Jan-2026
Page 77 of 793
PDF with 3960 Questions

If the MM hypothesis about dividends is correct, and if one found a group of companies which differed only with respect to dividend policy, which of the following statements would be most correct?

  1. All of these statements are true.
  2. The residual dividend model should not be used, because it is inconsistent with the MM dividend hypothesis.
  3. The total expected return, which in equilibrium is also equal to the required return, would be higher for those companies with lower payout ratios because of the greater risk associated with capital gains versus dividends.
  4. None of these statements are true.
  5. If the expected total return of each of the sample companies were divided into a dividend yield and a growth rate, and then a scatter diagram (or regression) analysis were undertaken, then the slope of the regression line (or b in the equation D1/Po = a + b(g)) would be equal to +1.0.

Answer(s): D

Explanation:

None of these statements are correct. Miller and Modigliani argued that the value of the firm depends only on the income produced by its assets, not on how this income is divided between dividends and retained earnings.



Which of the following terms describes the risk of individual projects to a corporation, taking into consideration that each project represents only one of the firm's portfolio of assets?

  1. Alpha coefficient
  2. Corporate risk
  3. Stand-alone risk
  4. Systematic risk
  5. Market risk

Answer(s): B

Explanation:

Corporate, or "within-firm" risk, is defined as the risk of individual projects to a corporation, taking into consideration the fact that each project represents only one of the firm's assets. In examining corporaterisk, there is an implicit assumption that some of the total risk to the firm's profits from the addition of new projects will be partially diversified away. Corporate risk is measured by the project's impact on uncertainty about the firm's future earnings.



Which of the following statements best describes the optimal capital structure?

  1. All of these answers are correct.
  2. None of these answers are correct.
  3. The optimal capital structure is the mix of debt, equity, and preferred stock, which maximizes the company's stock price.
  4. The optimal capital structure is the mix of debt, equity, and preferred stock which minimizes the company's cost of debt.
  5. The optimal capital structure is the mix of debt, equity, and preferred stock which maximizes the company's earnings per share (EPS).

Answer(s): C

Explanation:

The optimal capital structure is the one that maximizes the price of the firm's stock, and minimizes the firm's WACC.



Consider the following information:
30-day treasury rate (Risk Free rate) 6.4%
Company XYZ Bond yield 11.2%
Beta 1.1
Risk Premium 3.5%
Credit Rating B-
Marginal Tax Rate 40% Calculate Company XYZ's cost of retained earnings using the Bond-Yield-plus-Risk- Premium approach.

  1. 17.6%
  2. 15.2%
  3. 14.7%
  4. 8.82%
  5. 16.17%
  6. 11.36%

Answer(s): C

Explanation:

To estimate a firm's cost of retained earnings using the Bond-Yield-plus-Risk-Premium approach, simply take the company's bond yield and add the risk premium. In this case the cost of retained earnings = 11.2% + 3.5% = 14.7%.



An increase in which of the following, holding everything else equal, will cause a decrease in the theoretical growth rate of common stock dividends according to the Growth Rate of Dividends Model?

  1. Return on equity
    II. Tax rate
    III. Dividend payout ratio
    IV. Annual dividend
  2. Discount rate
    VI. Beta coefficient
    VII. Retention rate
  3. I, II, IV
  4. II, III, VI, V
  5. I, II, VI, V
  6. III
  7. III, VI, VII
  8. VII

Answer(s): D

Explanation:

III The equation used to determine the theoretical growth rate of common stock dividends is as follows: {Annual growth rate = [ROE * (1 - dividend payout ratio)]} As you can see, of the choices listed, only an increase in the dividend payout ratio will cause a decrease in the theoretical growth rate of common stock dividends.
Remember that the retention rate is equal to (1 - dividend payout ratio). Additionally, neither the discount rate nor the tax rate is explicitly factored into the dividend growth rate equation.



Viewing page 77 of 793
Viewing questions 381 - 385 out of 3960 questions



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

Join the CFA I Discussion