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Test Prep CFA-Level-I Exam
CFA® Level I Chartered Financial Analyst (Page 152 )

Updated On: 11-Jan-2026
Page 152 of 793
PDF with 3963 Questions

David Bateman is contemplating the purchase of a shopping center. The average annual after tax cash flow for the next ten years is expected to be $30,000. The property cost $750,000. Bateman will put down 25 percent and borrow the rest. In ten years, the property will be sold netting $350,000 after taxes. What is the approximate yield on the shopping center?

  1. 21.35.
  2. 17.2%.
  3. 12.3%.
  4. 14.8%.

Answer(s): B

Explanation:

[30000 + (350,000-187,500)/10] / [(187500 + 350000) /2]



Which of the following statements about investment companies is false?

  1. The 12b-1 plan allows funds to deduct up to 1.25% of average assets per year to cover marketing expenses.
  2. Closed end investment companies trade at the net asset value of the shares.
  3. The fund's net asset value is the prevailing market value of all the fund's assets divided by the number of fund shares outstanding.
  4. The typical management fees charged to compensate the Management Company for the expense of running the fund are between ¼ and 1% of the fund's net asset value.

Answer(s): B

Explanation:

Closed end funds sell for whatever people will pay for them. CE funds typically sell at premiums or discounts from their NAV.



Leveraged buyout financing is used by management to:

  1. take a private firm public.
  2. buy additional product lines.
  3. develop new lines to revitalize the firm.
  4. take a public firm private.

Answer(s): D



Tony Nguyen works in the investor relations department of a medium sized technology firm. He recently received the following e-mail: "I am an investor concerned with agency problems between managers and stockholders. What assurance do I have that the company works to align the interests of these two groups?" Which of the following actions that the firm has taken does NOT address the e-mail's concerns?

  1. Every employee receives performance shares and cash bonuses, based on his or her position and company earnings per share results.
  2. The company recently expanded its executive stock-option program to include middle-level managers.
  3. The company recently adopted a shareholder rights plan that allows existing shareholders favorable terms over outside parties. The plan is triggered if a person or group acquires beneficial ownership of 10 percent or more of the company's common stock.
  4. The board has a reputation for aggressively monitoring current management and is quick to remove poor- performing managers.

Answer(s): C

Explanation:

The shareholder rights agreement is an example of a poison pill, a device used to discourage hostile takeovers.
The threat of takeover is a mechanism designed to reduce conflicts between managers and shareholders, so anything that weakens the threat would not align the interests of managers and shareholders.
Performance shares, cash bonuses, and stock option plans are examples of managerial compensation mechanisms designed to align the interests of stockholders and managers. The aggressive board is an example of the threat of firing mechanism. The other mechanism noted in the reading is direct intervention by shareholders. The goal of these mechanisms is to motivate managers to achieve a higher stock price, which improves shareholder wealth.



Thomas Otto is an associate in the strategic consulting group for a medium-sized manufacturing company. Historically, the firm has financed projects using internal equity funds. The company is approaching the retained earnings break-even point, and the group's Executive Vice President asks Otto to determine the change in the weighted average cost of capital (WACC) if the firm uses external equity funds instead of internal funds. An analyst in the group provides the following information:
And, the firm's investment bank provides the following projections for a new common stock issue:
Which of the following choices best completes the following sentence? Using this information, Otto reports that the WACC will:

  1. increase by 1.82%.
  2. increase by 1.66%.
  3. decrease by 1.66%.
  4. remain the same.

Answer(s): A

Explanation:

Step 1: Calculate WACC using internal equity:
WACC = (wd)(kd) + (ws)(ks), where wd, wsare the weights used for debt and retained earnings.
WACC = (0.40 * 6.0%) + (0.60 * 13.0%) =10.20%.
Step 2: Calculate WACC using external equity (new common stock):
First, we need to determine the cost of new common equity.
Thecost of new common equityis given by:
ke= [D1/ (P0(1 ­ F))] + g
where
F = the percentage flotation cost incurred in selling new stock, or (current stock price ­ funds going to company) / current stock price D1= Dividend in next year
P0= Current stock price
g = Dividend growth rate
Here, D1and F are given, and ke= [ 2.33 / (30 * (1 ­ 0.035))] + 0.08 = 0.1604 or 16.04% Then, calculate WACC as before:
WACC = (wd)(kd) + (we)(ke), where wd, weare the weights used for debt and common equity.
WACC = (0.40 * 6.0%) + (0.60 * 16.04%) =12.02%.
Step 3: Calculate the difference:
The change in WACC = 12.02% - 10.20% = 1.82%, or an increase of 1.82%.



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