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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 96 )

Updated On: 26-Jan-2026
Page 96 of 793
PDF with 3960 Questions

The following information applies to a company's preferred stock:
Current price $101.00 per share
Par value $100.00 per share
Annual dividend $6.50 per share
The company issued the preferred stock at par and incurred a 10% floatation cost. If the company's marginal corporate tax rate is 34%, what is the after-tax cost of preferred stock?

  1. 4.3%
  2. 6.4%
  3. 13%
  4. 4.2%
  5. 6.5%
  6. 7.2%

Answer(s): F

Explanation:

The cost of preferred stock is calculated as the preferred stock dividend divided by the net issuing price. The dividend for this preferred stock is $6.50, and the net issuing price was $90.00. Thus the cost of preferred stock is 6.5 divided by 90 or 7.2%. There are no tax savings associated with the use of preferred stock, therefore no tax adjustments are made when calculating the cost.



Consider the following information:
30-day treasury rate (Risk Free rate) 5.2%
Company XYZ Bond yield 12.2%
Beta 1.2
Risk Premium 4.5%
Credit Rating BBB
Calculate Company XYZ's cost of retained earnings using the Bond-Yield-plus-Risk-Premium approach.

  1. 21.9%
  2. 16.7%
  3. 12.2%
  4. 5.2%
  5. 20.4%
  6. 9.7%

Answer(s): B

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 = 12.2% + 4.5% = 16.7%.



Which of the following is not a cash flow that results from the decision to accept a project?

  1. Externalities.
  2. Shipping and installation costs.
  3. Opportunity costs.
  4. Changes in working capital.
  5. Sunk costs.

Answer(s): E

Explanation:

Sunk cost is not a relevant cash flow.



A stock split will cause a change in the total dollar amounts shown in which of the following balance sheet accounts?

  1. Retained earnings
  2. Cash
  3. None of these will change
  4. Paid-in capital
  5. Common stock

Answer(s): C

Explanation:

If a stock rises above a specific amount, management may declare, for example, a two-for-one stock split, where the number of shares outstanding doubles and the stock price is halved. Each stockholder would have more shares, but each share is worth less. Theoretically, a stock split should not affect the value of the firm.
They are generally used after a sharp price run-up to produce a large price reduction.



Consider the following information:
30 day T-Bill rate (Risk free rate) 7.2%
Common Stock Beta 0.8
Expected Rate of return for the market 15.0%
Net Worth to Total Asset Multiple .25
Calculate this firm's cost of retained earnings using the CAPM approach.

  1. 7.2%
  2. 13.44%
  3. 12.0%
  4. 9.6%
  5. 22.2%
  6. 10.2%

Answer(s): B

Explanation:

To calculate the cost of retained earnings for a firm using CAPM, one may use the following formula: Cost of retained earnings = risk free rate + ((expected rate of return on the market - risk free rate) x Beta). In this case the cost of retained earnings = 7.2% + ((15.0% - 7.2%) x 0.8 = 13.44%.



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