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 79 )

Updated On: 26-Jan-2026
Page 79 of 793
PDF with 3960 Questions

Lincoln Lodging Inc. estimates that if its sales increase 10 percent then its net income will increase 18 percent. The company's EBIT equals $2.4 million, and its interest expense is $400,000. The company's operating costs include fixed and variable costs. What is the level of the company's fixed operating costs?

  1. $2,125,000
  2. $2,000,000
  3. $1,200,000
  4. $666,667
  5. $450,000

Answer(s): C

Explanation:

We're given enough information to find both DFL and DTL.
DTL = .18/.10 = 1.8.
DFL = $2,400,000/($2,400,000 - $400,000) = 1.2
Given DTL = DFL x DOL, we can calculate DOL = 1.5. Recognizing S - VC - FC = EBIT, 1.5 = (S - VC)/$2,400,000 or S - VC = $3,600,000. The difference between (S - VC) and EBIT must represent fixed operating costs. Thus, FC = $3,600,000 - $2,400,000 = $1,200,000.



The Altman Company has a debt ratio of 33.33 percent, and it needs to raise $100,000 to expand. Management feels that an optimal debt ratio would be 16.67 percent. Sales are currently $750,000, and the total assets turnover is 7.5. How should the expansion be financed so as to produce the desired debt ratio?

  1. Finance 20 percent debt, 80 percent equity.
  2. Finance 40 percent debt, 60 percent equity.
  3. Finance it all with debt.
  4. Finance 50 percent debt, 50 percent equity.
  5. Finance it all with equity.

Answer(s): E

Explanation:

Old debt ratio = 0.3333; New debt ratio = 0.1667.
$750,000/TA= 7.5.
TA = $100,000.
Debt = 0.3333($100,000) = $33,330.
New TA = $100,000 + $100,000 = $200,000.
New Debt = $200,000(0.1667) = $33,340.
Altman's current debt of $33,330 represents approximately 16.67% of total assets following the expansion, thus the firm should finance with 100 percent equity.



Which of the following is a key determinant of operating leverage?

  1. Cost of debt.
  2. Technology.
  3. Level of debt.
  4. Capital structure.
  5. Physical location of production facilities.

Answer(s): B

Explanation:

If a high percentage of a firm's total costs are fixed, the firm has high operating leverage. Higher fixed costs are generally associated with more highly automated, capital-intensive firms and industries.



Which of the following statements is most correct?

  1. All of these answers are correct.
  2. An increase in the risk-free rate is likely to decrease the marginal cost of both debt and equity financing.
  3. The WACC is calculated on a before-tax basis.
  4. None of these answers are correct.
  5. The WACC (Weighted Average Cost of Capital) for a given capital budget level is a weighted average of the marginal cost of each relevant component which makes up the firm's target capital structure.

Answer(s): E

Explanation:

A value-maximizing firm will establish a target (optimal) capital structure and then raise new capital in a manner that will keep the actual capital structure on target over time. The target proportions of debt, preferred stock, and common equity, along with the component cost of capital, are used to calculate the firm's WACC.



Which of the following statements is most correct?

  1. The factors which affect a firm's business risk are determined partly by industry characteristics and partly by economic conditions. Unfortunately, these and other factors, which affect a firm's business risk, are not subject to any degree of managerial control.
  2. The firm's financial risk may have both market risk and diversifiable risk components.
  3. One of the benefits to a firm of being at or near its target capital structure are that financial flexibility becomes much less important.
  4. A firm's business risk is solely determined by the financial characteristics of its industry.
  5. All of these statements are false.

Answer(s): B

Explanation:

Financial risk is an increase in stockholders' risk, over and above the firm's basic business risk, resulting from the use of financial leverage, which refers to the use of fixed-income securities.



Viewing page 79 of 793
Viewing questions 391 - 395 out of 3960 questions



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

Join the CFA I Discussion