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IIA CIA Exam
Certified Internal Auditor Exam (Page 17 )

Updated On: 12-Jan-2026
Page 17 of 342
PDF with 1702 Questions

Preference shares are securities with characteristics of both ordinary shares and bonds. Preference shares have <List A> like ordinary shares and <List B> like bonds.

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): D

Explanation:

Like ordinary shares but unlike bonds), preference shares have no maturity date, although certain preference shares transient preference shares) must be redeemed within a short time e.g., 5 to 10 years). Like bonds but unlike ordinary shares), preference shares have a fixed periodic payment. The fixed payment is in the form of a stated dividend in the case of the preference shares and interest payments in the case of bonds. However, preference dividends, unlike interest, do not become an obligation unless declared.



Assume that the value of a share of QQ Company ordinary stock at the expiration date is either US $30 or US $45. What is the difference in the net payoff on the portfolio because of a difference in the stock price at the maturity date?

  1. US $10.00
  2. US $7.50
  3. US $5.00
  4. US $0

Answer(s): D

Explanation:

If the stock price at the maturity date is US $30, AA Company will have a share of stock worth US $30 and a put option worth US $10 $40 exercise price ­$30 stock price). The call option will be worthless. Hence, the net payoff is US $40 $30 + $10). If the stock price at the maturity date is US $45, the share of stock will be worth US $45, the put will he worthless, and the loss on the call will be US $5 $45 - $40). Thus, the net payoff will be US $40 $45 - $5). Consequently, the difference in the net payoff on the portfolio because of a difference in the stock price at the maturity date is US $0 $40 - $40).



When an entity increases its degree of financial leverage DFL), the

  1. Equity beta of the entity falls.
  2. Systematic risk of the entity falls.
  3. Systematic risk of the entity rises.
  4. Standard deviation of returns on the equity of the entity rises.

Answer(s): D

Explanation:

The DFL equals the percentage change in FPS earnings available to ordinary shareholders) divided by the percentage change in net operating profit or loss. When the DFL rises, fixed interest charges and the riskiness of the entity rise. As a result, the
variability of returns will increase. In other words, the standard deviation of returns of the entity rises.



In its first year of operations, an entity had US $50, 000 of fixed operating costs. It sold 10, 000 units at a US $10 unit price and incurred variable costs of US $4 per unit. If all pnc es and costs will be the same in the second year and sales are projected to rise to 25, 000 units, what will the degree of operating leverage the extent to which fixed costs are used in the entity's operations) be in the second yc _u?

  1. 1 25
  2. 1 50
  3. 2.0
  4. 6.0

Answer(s): B

Explanation:

The DOL may be calculated as the contribution margin sales - variable cost) divided by the excess of the contribution margin ever It <:ed costs. The contribution margin is US $150.000 [25.000 units x $10 unit price ­ $4 unit variable cost)]. Hence, the DOL in the second year is 1.50 [US $150, 000 CM ÷ $150, 000 ­ $50, 000 FC)].



If an entity has a higher dividend-payout ratio. then. if all else is equal, it will have a

  1. Higher marginal cost of capital.
  2. Lower marginal cost of capital.
  3. Higher investment opportunity schedule.
  4. Lower investment opportunity schedule.

Answer(s): A

Explanation:

The higher the dividend-payout ratio, the sooner retained earnings are exhausted and the entity must seek external financing. Assuming the name investments are undertaken, the result is a higher marginal coot of capital because lower-cost capital sources will be used up earlier.



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