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 91 )

Updated On: 26-Jan-2026
Page 91 of 793
PDF with 3960 Questions

The percentage mix of debt, preferred stock, and common equity that will maximize a firm's stock price is known as:

  1. Marginal cost of capital
  2. Weighted average cost of capital (WACC)
  3. After tax cost of capital
  4. Marked to market value of equity
  5. Target (Optimal) Capital Structure

Answer(s): E

Explanation:

The target or optimal capital structure of a firm is that percentage mix of debt, preferred stock, and common equity that will maximize the firm's stock price.



Which of the following is false?

  1. The IRR rule is not dependable when applied to projects with non-normal cash flows.
  2. For independent projects with normal cash flows, the IRR and NPV rules give the same accept/reject results.
  3. For mutually exclusive projects, the IRR and NPV rules can give conflicting results.
  4. None of these answers.

Answer(s): D

Explanation:

Remember to always use the NPV result. There are quite a few problems with using other decision rules like IRR and payback period.



Calculate the cost of debt for the following firm:
Borrowing Rate 9.5%
Historical Beta .97
Marginal Tax Rate 40%
Credit Rating BB+
Owner's Equity 15%
Quick Ratio 1.7
EPS $1.70
P/E ratio 12
Estimated Dividends $.30

  1. 8.075%
  2. 6.27%
  3. 1.43%
  4. 5.7%
  5. 1.5%
  6. 9.5%

Answer(s): D

Explanation:

The cost of debt is simply the rate of borrowing less the tax savings. Due to the fact that interest expense is tax deductible, the cost of debt in this case is 9.5%(1 - .4) = 9.5%(.6) = 5.7%.



Bell Brothers has $3,000,000 in sales. Its fixed costs are estimated to be $100,000, and its variable costs are equal to fifty cents for every dollar of sales. The company has $1,000,000 in debt outstanding at a before-tax cost of 10 percent. If Bell Brothers' sales were to increase by 20 percent, how much of a percentage increase would you expect in the company's net income?

  1. 15.66%
  2. 18.33%
  3. 19.24%
  4. 23.08%
  5. 21.50%

Answer(s): D

Explanation:

Step 1 Find Degree of Total Leverage (DTL)
DTL = (S-VC)/(S-VC-F-I) = ($3,000,000-$1,500,000)/($3,000,000-$1,500,000-$100,000-$100,000 = 1.1538.
Step 2 Find percentage increase in net income:
%Change NI = (0.20)(DTL) = (0.20)(1.1538) = 0.2308 = 23.08%.



A firm is considering a project whose estimated cash flows have indicated a payback period of 3.68 years. It requires an initial outlay of $1,000 and has end-of-year cash flows of $350, $270 and $225 in the first 3 years. The firm's marginal discount rate is 9%. The project's projected cash flow for year 4 equals ________.

  1. 373
  2. 514
  3. 495
  4. 228

Answer(s): D

Explanation:

The payback period is defined as the expected number of years that would be required to recover the original investment. In particular, Payback period = Years before full recovery + (unrecovered cost at the start of payback year)/(net cash flow in the payback year) In this case, the recovery occurs in the 3rd year. At the beginning of the 3rd year, the unrecovered cost equals 1,000 - 350 - 270 - 225 = 155. If total cash flow in the 4th year equals C, then payback period = 3 + 155/C = 3.68 years. Solving for C gives C = 228. Note that the discount rate does not figure in the calculation of payback period.



Viewing page 91 of 793
Viewing questions 451 - 455 out of 3960 questions



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

Join the CFA I Discussion