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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 93 )

Updated On: 26-Jan-2026
Page 93 of 793
PDF with 3960 Questions

Which of the following are objectives of conducting a post audit? Choose the best answer.

  1. Identifying arbitrage opportunities
    II. Improving forecasts
    III. Identifying expansion opportunities
    IV. Improve operations
  2. Adhering to governmental guidelines for performance presentation
  3. I, II, V
  4. I, II, III, IV
  5. I, II, VII
  6. II, IV
  7. I, II, III, IV, V
  8. I, III, IV

Answer(s): D

Explanation:

The post-audit is an important aspect of the capital budgeting process, and involves two steps. Specifically, the post audit involves comparing actual results with forecasted results and determining why any differences exist.
There are numerous specific reasons why companies conduct post-audits, but these reasons can be assimilated into two main objectives. Specifically, the objectives of the postaudit are to improve forecasting capacity and improve operations.



In an investigation of Clay Industries, Marcus Litton, a financial analyst, has determined the following information:
Sales: $300,000,000
Fixed costs: $100,000,000
Variable costs: $115,200,000
Interest expense: $1,800,000
Tax rate: 35%
Weighted Average Cost of Capital: 10.15%
Beta coefficient: 0.80
Common shares outstanding: 10,000,000
Mr. Litton has asked for your assistance in determining the earnings per share (EPS) of Clay Industries. Using this information, which of the following answers correctly illustrates this EPS calculation?

  1. $2.91
  2. $6.17
  3. $6.80
  4. The EPS figure cannot be completely determined from the information provided.
  5. $4.90
  6. $5.40

Answer(s): F

Explanation:

The EPS figure is perhaps the single most popular term in the field of conventional equity investments. Any glance into financial media and business periodicals will undoubtedly uncover numerous instances in which the EPS figure is cited. While quite popular and useful, many individuals do not understand the mechanics behind the EPS calculation, and an investigation into the components of EPS is a valuable learning experience. The EPS calculation is found by the following equation: {EPS = [(Sales - Fixed Costs - Variable Costs - Interest Expense)(1 - Tax Rate)] / [# of Common Shares Outstanding]} Additionally, the EPS figure can be found by:
{EPS = [(EBIT - Interest Expense)(1 - Tax Rate) / # of Common Shares Outstanding]} Incorporating the given information into the first EPS equation will yield the following: {EPS = {[($300,000,000 - $100,000,000 - $115,200,000 - $1,800,000)(1 - 0.35)] / 10,000,000]} = $5.40.



Howell Enterprises is forecasting EPS of $4.00 per share for next year. The firm has 10,000 shares outstanding, it pays 12 percent interest on its debt, and it faces a 40 percent marginal tax rate. Its estimated fixed costs are $80,000 while its variable costs are estimated at 40 percent of revenue. The firm's target capital structure is 40 percent equity and 60 percent debt and it has total assets of $400,000. On what level of sales is Howell basing its EPS forecast?

  1. $105,280
  2. $292,444
  3. $1,000,000
  4. $480,400
  5. $316,722

Answer(s): B

Explanation:

EPS = (Sales - Fixed costs- Variable costs - Interest)(1 - T)/Shares outstanding.
Step 1 Calculate interest expense
Debt = 0.60 x $400,000 = $240,000.
Interest = 0.12 x $240,000 = $28,800.
Step 2 Solve for Sales (S)
EPS = $4.00 = (S - 0.40S - $80,000 - $28,800) x (1 - 0.40)/10,000 = (0.60S - $108,800)(0.6)/10,000
$4.00 = (0.36S - $65,280)/10,000
$105,280 = 0.36S
Sales = $292,444.44.
Alternative method
EPS = (EBIT - Interest)(1 - T)/Shares outstanding.
Solve for EBIT
Net Income = EPS x Shares outstanding = $4.00 x 10,000 = $40,000.
EBT = NI/(1 - T) = $40,000/(0.6) = $66,667.
Interest (from above) = $28,800.
EBIT = EBT + Interest = $66,667 + $28,800 = $95,467.
S = 0.40S + $95,467 + $80,000
0.6S = $175,467
S = $175,467/0.6 = $292,445.



An increase in the tax rate ________ the optimal debt-to-equity ratio. It ________ the after-tax cost of debt.
Assume all else equal.

  1. this answer cannot be generated because "tax" is not a factor in the optimal debt-to-equity ratio
  2. increases; increases
  3. this answer cannot be generated because "tax" is not a factor in after-tax cost of debt
  4. decreases; increases
  5. increases; decreases
  6. decreases; decreases

Answer(s): E

Explanation:

Since interest payments are tax deductible, higher tax rates make debt more attractive relative to equity, increasing the optimal D/E ratio. The after-tax cost of debt decrease, assuming that the pre-tax cost of debt is not affected by the change in the tax rate (in reality, it could increase due to decreased profitability of the firm and the resultant decrease in its solvency).



The internal rate of return of a capital investment

  1. changes when the cost of capital changes.
  2. must exceed the cost of capital in order for the firm to accept the investment.
  3. is equal to the annual net cash flows divided by one half of the project's cost when the cash flows are an annuity.
  4. all of the answers are correct.

Answer(s): B

Explanation:

The IRR is calculated by finding the discount rate that equates the present value of future cash inflows to the project's cost. The IRR is the project's expected rate of return. If the IRR exceeds the cost of the funds used to finance the project, a surplus accrues. Thus, accepting a project whose IRR exceeds its cost of capital increases shareholder wealth.



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