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Free Test Prep CFA-Level-I Exam Questions

Polk Products is considering an investment project with the following cash flows:
tCash Flow
0-100,000
140,000
290,000
330,000
460,000
The company has a 10 percent cost of capital. What is the project's discounted payback?

  1. 2.67 years
  2. 1.86 years
  3. 2.49 years
  4. 1.67 years
  5. 2.11 years

Answer(s): B

Explanation:

The PV of t = 1 CF is found as follows: N = 1, I = 10, PMT = 0, FV = 40,000, and, thus PV = - $36,363.64.
Similarly, find the PV of t = 2 CF which is $74,380.17. Since the sum of these PVs is greater than the t = 0 CF of $100,000, we know the discounted payback is less than two years. We can now solve for the discounted payback period as follows: DP = 1 + ($100,000 - $36,363.64)/$74,380.17 = 1.86.



Your company is choosing between the following non-repeatable, equally risky, mutually exclusive projects with the cash flows shown below. Your cost of capital is 10 percent. How much value will your firm sacrifice if it selects the project with the higher IRR? Project S:
-1,000500500500
Project L:
012345
-2,000668.76668.76668.76668.76668.76

  1. $481.15
  2. $291.70
  3. $332.50
  4. $243.43
  5. $535.13

Answer(s): B

Explanation:

NPV(S) = $243.43; IRR(S) = 23.38%.
NPV(L) = $535.13; IRR(L) = 20.00%.
Value sacrificed: $535.13 - $243.43 = $291.70.



Simmons Shoes is considering a project with the following cash flows:
TimeProject Cash Flows ($)
0-700
2-200
Simmons' WACC is 10 percent. What is the project's modified internal rate of return (MIRR)?

  1. 28.93%
  2. 17.10%
  3. 18.26%
  4. 29.52%
  5. 25.28%

Answer(s): C

Explanation:

There are three steps to getting an MIRR:
1. Find PV of outflows:
-$700 + -$200/(1.1)^2 = -$865.2893.
2. Find FV of inflows:
$400 (1.1)^3 + $600(1.1) + $500 = $1,692.40.
3. Find MIRR:
N = 4
PV = -865.2893
PMT = 0
FV = 1,692.40
Solve for I = MIRR = 18.2593%.



Consider the following information for Company XYZ:
Current Price of Stock $35.00
Expected dividend in 1 Year $1.20
Growth rate 7.2%
Beta 1.6
Risk Free Rate 4.5%
Expected Market Return 15%
Marginal Corporate Tax rate 34%
Bond Yield 12.34%
Calculate this company's cost of retained earnings using the Discounted Cash Flow (DCF) method.

  1. 10.63%
  2. 11.52%
  3. 13.30%
  4. 9.20%
  5. 12.0%
  6. 21.30%

Answer(s): A

Explanation:

The DCF method for estimating the cost of retained earnings states: Cost of Retained Earnings = (Dividend for period 1 / Current Price) + Growth Rate. In this case the estimated Cost of Retained Earnings = (1.2 / 35.00) + 7.2% = 3.43 + 7.2 = 10.63%



Sensitivity Analysis ignores:

  1. the range of likely values that key variables can take.
  2. changes in some of the key variables.
  3. none of these answers.
  4. effect on the IRR of changes in project variables.

Answer(s): A

Explanation:

One of the drawbacks of Sensitivity Analysis is that it ignores the range of likely values that key variables can take. This is rectified using Scenario Analysis.



You have recently accepted a one-year employment term by a firm. The firm has given you the option of receiving your salary as a lump sum value of $30,000 at the end of the year or as 12 monthly payments of $2,400 starting one month after you start work. If your relevant discount rate is 2 percent per month, then which salary options would you prefer? (Ignore taxes, risk, and consumption needs.)

  1. Monthly payments, since you do not have to wait so long to receive your money.
  2. Monthly payments, since it has the larger present value.
  3. The lump sum payment, since it has the larger present value.
  4. Either one, since they have the same present value.
  5. The lump sum payment, since it has the larger future value.

Answer(s): B

Explanation:

Monthly option PV = $2,400(PVIFA(2%,12)) = $2,400(10.5753) = $25,380.72.
Annual option PV = $30,000(PVIF(2%,12)) = $30,000(0.7885) = $23,655.



Which of the following is most likely to encourage a company to use more debt in its capital structure?

  1. All of these answers are correct.
  2. An increase in unit production.
  3. An increase in the corporate tax rate.
  4. An increase in the company's degree of operating leverage.
  5. An increase in the personal tax rate.

Answer(s): C

Explanation:

A major reason for using debt is that interest is deductible, which lowers the effective cost of debt.



A firm has a dividend growth rate of 2.8%. It typically pays out 48% of its earnings as dividends. Recently, it paid out $2.4 per share dividend and the required rate of return on its stock is 13%. The firm's return on equity equals ________.

  1. 5.83%
  2. 5.38%
  3. insufficient information
  4. 12.19%

Answer(s): B

Explanation:

g = ROE*(1 - dividend payout ratio). Therefore, ROE = 0.028/(1 - 0.48) = 5.38%.



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