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Test Prep CFA-Level-I Exam
CFA® Level I Chartered Financial Analyst (Page 2 )

Updated On: 19-Jan-2026
Page 2 of 793
PDF with 3963 Questions

According to the AIMR-PPS, ________ are defined to include all discretionary and nondiscretionary assets.

  1. individually managed assets
  2. individual investor's assets
  3. total firm assets
  4. global assets

Answer(s): C

Explanation:

Total firm assets are defined to include all discretionary and nondiscretionary assets. Total firm assets don't refer to assets underlying overlay investment strategies, such as currency overlay, options and futures overlays, securities lending programs and asset allocation overlay strategies, unless the firm actually manages the underlying assets.



Ameriscam, Inc. is considering the issuance of some perpetual preferred stock. The Company's corporate tax rate is 30%, and the yield on its outstanding senior debt is 7.55%. Additionally, Ameriscam has been told by a leading investment bank that if issued, its preferred stock would merit a price of $40 net of flotation costs and other charges. If issued, the firm plans to dedicate preferred annual dividends of $2.35 per share. What is the cost of the proposed preferred stock for this firm?

  1. The cost of preferred stock cannot be calculated from the information supplied.
  2. 2.265%
  3. 7.98%
  4. 0.0875%
  5. 5.875%

Answer(s): E

Explanation:

The cost of preferred stock can be found by dividing the annual dividend by the issuing price, which is net of any underwriting, or "flotation," charges. The cost of preferred stock in this example is very low. Typically, the cost of preferred stock is greater than the cost of debt but less than the cost of common equity.



Petersen Co. has a capital budget of $1,200,000. The company wants to maintain a target capital structure, which is 60 percent debt and 40 percent equity. The company forecasts that its net income this year will be $600,000. If the company follows a residual dividend policy, what will be its payout ratio?

  1. 20%
  2. 80%
  3. 60%
  4. 40%
  5. 0%

Answer(s): A

Explanation:

The amount of new investment, which must be financed with equity, is: $1,200,000 x 40% = $480,000. Since the firm has $600,000 of net income only $120,000 will be left for dividends. This means the payout ratio is $120,000/$600,000 = 20%.



In theory, the decision-maker should view market risk as being of primary importance. However, within-firm, or corporate, risk is relevant to a firm's

  1. All of the answers are correct.
  2. None of the answers are correct.
  3. Creditors, because it affects the firm's credit worthiness.
  4. Management, because it affects job stability.
  5. Well-diversified stockholders, because it may affect debt capacity and operating income.

Answer(s): A

Explanation:

These are all relevant to a firm's corporate risk, which is measured by the project's impact on uncertainty about the firm's future earnings.



Arizona Rock, an all-equity firm, currently has a beta of 1.25, and k(RF) = 7 percent and k(M) = 14 percent. Suppose the firm sells 10 percent of its assets (beta = 1.25) and purchases the same proportion of new assets with a beta of 1.1. What will be the firm's new overall required rate of return, and what rate of return must the new assets produce in order to leave the stock price unchanged?

  1. 15.750%; 15.645%
  2. 14.750%; 15.750%
  3. 15.645%; 14.700%
  4. 15.750%; 14.700%
  5. 15.645%; 15.645%

Answer(s): C

Explanation:

b(old, firm) = 1.25.
k(old, firm) = 0.07 + (14 - 7)1.25 = 15.75%.
b(new, firm) = 0.9(1.25) + 0.1(1.1) = 1.235.
k(new, firm) = 0.07 + 1.235(0.07) = 15.645%.
k(new, assets) = 0.07 + 1.1(0.07) = 14.7%.



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