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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 99 )

Updated On: 26-Jan-2026
Page 99 of 793
PDF with 3960 Questions

The date on which if you are listed by the company as an owner, you will receive a dividend is known as the:

  1. Holder-of-Record Date
  2. Declaration Date
  3. Beneficiary Date
  4. Payment Date
  5. Ex-Dividend Date

Answer(s): A

Explanation:

The "Holder-of-Record Date" is the date on which if you are listed by the company as an owner, you will receive the dividend.



Which of the following statements is most correct?

  1. The component cost of preferred stock is expressed as k(ps) (1 - T), because preferred stock dividends are treated as fixed charges, similar to the treatment of debt interest.
  2. Due to the way the Marginal Cost of Capital (MCC) schedule is constructed, the first breakpoint in the MCC schedule must be associated with using up all available retained earnings and having to issue common stock.
  3. The cost of equity obtained by using retained earnings is generally regarded as being the rate of return stockholders require on the firm's outstanding common stock.
  4. The higher the firm's flotation cost for new common equity, the more likely the firm is to use preferred stock, which has no flotation cost.
  5. The bond-yield-plus-risk-premium approach to estimating a firm's cost of common equity involves adding a subjectively determined risk-premium to the market risk-free bond rate.

Answer(s): C

Explanation:

Preferred stock dividends are not tax deductible; therefore, the component cost of preferred stock is only k(ps).
The risk premium in the bond-yield-plus-risk premium approach would be added to the firm's cost of debt, not the risk-free rate. The first break point does not have to be associated with retained earnings. It could be from other sources of funds such as debt. The choice between preferred stock or common equity financing depends on a number of factors, including required return, flotation costs, management's desired capital structure, etc.



Regarding the net present value of a replacement decision, which of the following statements is false?

  1. The present value of the after-tax cost reduction benefits resulting from the new investment is treated as an inflow.
  2. The present value of depreciation expenses on the new equipment, multiplied by the tax rate, is treated as an inflow.
  3. An increase in net working capital is treated as an outflow when the project begins and as an inflow when the project ends.
  4. Any loss on the sale of the old equipment is multiplied by the tax rate and is treated as an outflow at t = 0.
  5. The after-tax market value of the old equipment is treated as an inflow at t = 0.

Answer(s): D

Explanation:

Since the old equipment is sold at a loss which reduces taxable income, a tax savings is realized and is deducted from the investment outlay.



The Global Advertising Company had net income after interest but before taxes of $40,000 this year. The marginal tax rate is 40 percent, and the dividend payout ratio is 30 percent. The company can raise debt at a 12 percent interest rate. The last dividend paid by Global was $0.90. Global's common stock is selling for $8.59 per share, and its expected growth rate in earnings and dividends is 5 percent. If Global issues new common stock, the flotation cost incurred will be 10 percent. Global plans to finance all capital expenditures with 30 percent debt and 70 percent equity. What is Global's cost of retained earnings?

  1. 10.33%
  2. 9.66%
  3. 12.22%
  4. 17.22%
  5. 16.00%

Answer(s): E

Explanation:

k(s) (component cost of retained earnings) = $.945/$8.59 + 0.05 = 0.1600 = 16.00%.



Marcus Corporation currently sells 150,000 units a year at a price of $4.00 a unit. Its variable costs are approximately 30 percent of sales, and its fixed costs amount to 50 percent of revenues at its current output level. Although fixed costs are based on revenues at the current output level, the cost level is fixed. What is Marcus's degree of operating leverage in sales dollars?

  1. 2.2
  2. 3.5
  3. 1.0
  4. 5.0
  5. 4.0

Answer(s): B

Explanation:

Use the information provided and the formula for DOL in sales dollars: DOL(s) = [($150,000 x $4.00)-180,000]/ [($150,000 x $4.00)-180,000-300,000] = 3.5



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