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 80 )

Updated On: 26-Jan-2026
Page 80 of 793
PDF with 3960 Questions

Jackson Jets is considering two mutually exclusive projects. The projects have the following cash flows:
Project A Project B
Time Cash FlowsC ash Flows
0-$10,000-$8,000
1 1,000 7,000
2 2,000 1,000
3 6,000 1,000
4 6,000 1,000
At what cost of capital, do the two projects have the same net present value?

  1. 13.03%
  2. 12.26%
  3. 11.20%
  4. 12.84%
  5. 14.15%

Answer(s): A

Explanation:

Find the differential cash flows by subtracting B's cash flows from A's cash flows for each year.
CF(0) = -2,000
CF(1) = -6,000
CF(2) = 1,000
CF(3) = 5,000
CF(4) = 5,000
Enter these cash flows and solve for the IRR = crossover rate = 13.03%.



Which of the following types of risk cannot be eliminated through diversification? Choose the best answer

  1. Unsystematic risk
  2. Market risk
  3. Corporate risk
  4. Alpha risk
  5. Gamma risk

Answer(s): B

Explanation:

Market risk is defined as that part of an asset's risk which cannot be eliminated through diversification. Market risk is measured by the Beta coefficient, and is commonly referred to as "systematic" or "nondiversifiable" risk.
Additionally, market risk is referred to as "beta risk." Corporate risk is defined as the variability of assets expected returns without taking into consideration the effects of shareholder diversification. This is one step away from Stand-alone Risk, which measures the risk of an asset, not only without taking into consideration the effect of shareholder diversification, but of company diversification as well. Stand-alone risk assumes that the asset in question is the only asset of the firm and that the securities of the firm are the only assets in investors' portfolios. Corporate risk takes into consideration that firms will diversify their asset bases.



Dumb & Dumber Development Company has two mutually exclusive investment projects to evaluate. Assume both projects can be repeated indefinitely. The following cash flows are associated with each project:
Time Project A Project B
0-$100,000-$70,000
1 30,000 30,000
2 50,000 30,000
3 70,000 30,000
4-30,000
5-10,000
The project types are equally risky and the firm's cost of capital is 12 percent. What is the EAA of the higher valued project? (Round your final answer to the nearest whole dollar.)

  1. $16,470
  2. $7,433
  3. $11,325
  4. $6,857
  5. None of the answers

Answer(s): B

Explanation:

Step 1 Calculate the NPV for both projects:
A:CF(0) = -100,000; CF(1) = 30,000; CF(2) = 50,000; CF(3) = 70,000; I/YR = 12; solve for NPV = $16,470.
B:CF(0) = -70,000; CF(1) = 30,000; CF(2) = 30,000; CF(3) = 30,000;CF(4) = 30,000; CF(5) = 10,000; I/YR = 12; NPV = $26,795.
Step 2 Calculate the EAA for both projects:
A: N = 3; I/YR = 12; PV = -16,470; FV = 0; solve for PMT = $6,857.
B: N = 5; I/YR = 12; PV = -26,795; FV = 0; solve for PMT = $7,433.
The PMT is the EAA for each project. Since Project B has the larger EAA $7,433 is the correct answer.



Consider the following information for a company.
Common Stock Price $53.25
Preferred Stock Par Price $50
Preferred Dividend $3.5
Debt Rating BB+
Owners Equity 25%
Preferred Stock Flotation Cost 2.0%
The Preferred Stock is issued at Par
Calculate the component cost of this newly issued preferred stock. (Note that for existing preferred stock, flotation costs may be ignored.)

  1. 18.78%
  2. 7.14%
  3. 6.57%
  4. 7.0%
  5. 10%
  6. 3.5%
  7. 12.5%

Answer(s): B

Explanation:

The component cost of preferred stock is the dividend divided by issue price minus floatation cost. In this case the component cost of preferred stock = $3.50 / (50 - 1) = 7.14%.



A project has the following cash flows over the next 5 years: $1,000, $600, $300, $1,200 and $1,400. Assume all cash flows occur at the end of a year. The project requires an initial cash outlay of $2,900. The project's cost of capital is 8%. The NPV of the project equals ________.

  1. $1,194
  2. $1,735
  3. $3,513
  4. $613

Answer(s): D

Explanation:

The discounted cash flow at the end of year N is obtained by dividing that year's cash flow by 1.08N, since the project's cost of capital is 8%. Using this, the discounted cash flows are:
$926, $514, $238, $882 and $953.
The present value of all the future cash flows = $(926 + 514 + 238 + 882 + 953) = $3,513. The NPV is then equal to $(3,513 - 2,900) = $613.



Viewing page 80 of 793
Viewing questions 396 - 400 out of 3960 questions



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

Join the CFA I Discussion