Cisco®
CompTIA
Checkpoint
ISC
EC-Council
EXIN
Fortinet
ITIL®
Juniper
Microsoft
VMware
Avaya
SAP
Google
Salesforce
Amazon
Palo Alto Networks
ISC2
All Vendors
  2. Home
  3. Exams
  4. Test Prep
  5. CFA-Level-I

Free Test Prep CFA-Level-I Exam Questions (page: 58)

Page 58 of 496
PDF with 3963 Questions

Bell Brothers has $3,000,000 in sales. Its fixed costs are estimated to be $100,000, and its variable costs are equal to fifty cents for every dollar of sales. The company has $1,000,000 in debt outstanding at a before-tax cost of 10 percent. If Bell Brothers' sales were to increase by 20 percent, how much of a percentage increase would you expect in the company's net income?

  1. 15.66%
  2. 18.33%
  3. 19.24%
  4. 23.08%
  5. 21.50%

Answer(s): D

Explanation:

Step 1 Find Degree of Total Leverage (DTL)
DTL = (S-VC)/(S-VC-F-I) = ($3,000,000-$1,500,000)/($3,000,000-$1,500,000-$100,000-$100,000 = 1.1538.
Step 2 Find percentage increase in net income:
%Change NI = (0.20)(DTL) = (0.20)(1.1538) = 0.2308 = 23.08%.



A firm is considering a project whose estimated cash flows have indicated a payback period of 3.68 years. It requires an initial outlay of $1,000 and has end-of-year cash flows of $350, $270 and $225 in the first 3 years. The firm's marginal discount rate is 9%. The project's projected cash flow for year 4 equals ________.

  1. 373
  2. 514
  3. 495
  4. 228

Answer(s): D

Explanation:

The payback period is defined as the expected number of years that would be required to recover the original investment. In particular, Payback period = Years before full recovery + (unrecovered cost at the start of payback year)/(net cash flow in the payback year) In this case, the recovery occurs in the 3rd year. At the beginning of the 3rd year, the unrecovered cost equals 1,000 - 350 - 270 - 225 = 155. If total cash flow in the 4th year equals C, then payback period = 3 + 155/C = 3.68 years. Solving for C gives C = 228. Note that the discount rate does not figure in the calculation of payback period.



A firm has a target dividend payout ratio of 36% and net income of $1.7 million. It is committed to maintaining an optimal capital structure consisting of 63% debt and 37% equity. The firm is in the 40% tax bracket. Its retained earnings breakpoint equals ________.

  1. $1.89 million
  2. $2.58 million
  3. $1.31 million
  4. $2.75 million
  5. $2.94 million
  6. $3.41 million
  7. $4.64 million

Answer(s): E

Explanation:

The retained earnings breakpoint refers to the maximum amount of capital that can be raised using retained earnings, assuming a constant capital structure and dividend payout ratio. In other words, it is the maximum amount of capital that can be raised without increasing the marginal cost of capital. In the present example, the maximum internal equity capital equals 1.7 * 0.64 = $1.088 million. To maintain a D/E ratio of 63/37 = 1.7, the amount of debt to be issued equals 1.088 * 1.7 = $1.85 million. Therefore, earnings break-point equals (1.088 + 1.85) million = $2.938 million.



A project has a high correlation with the firm's other projects. It also has a low CAPM beta. The project will have ________ corporate risk and ________ market risk.

  1. high; high
  2. high; low
  3. low; low
  4. low; high

Answer(s): B

Explanation:

Corporate risk measures the impact of a project on the corporate earnings while market risk measures its effect on the systematic risk of the stock. Since the project's returns are highly correlated with those of the firm's other projects, it will increase the earnings volatility. At the same time, due to low beta, the project will have a low market risk.



Which of the following statements is most correct?

  1. If it could be demonstrated that a clientele effect exists, this would suggest that firms could alter their dividend payment policies from year to year to take advantage of investment opportunities without having to worry about the effects of changing dividends on capital costs.
  2. Each of these statements are false.
  3. If a company raises its dividend by an unexpectedly large amount, the announcement of this new and higher dividend is generally accompanied by an increase in the stock price. This is consistent with the bird-in-the- hand theory, and Modigliani and Miller used these findings to support their position on dividend theory.
  4. If the dividend irrelevance theory (which is associated with the names Modigliani and Miller) were exactly correct, and if this theory could be tested with "clean" data, then we would find, in a regression of dividend yield and capital gains, a line with a slope of -1.0.
  5. The tax preference and bird-in-the-hand theories lead to identical conclusions as to the optimal dividend policy.

Answer(s): D

Explanation:

The main conclusion of MM's irrelevance theory is that dividend policy does not affect the required rate of return on equity. MM theorized that k(s) is independent of dividend policy, implying that investors are indifferent between dividends and capital gains.



Which of the following statements is most correct?

  1. The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.
  2. As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS.
  3. The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price.
  4. All of these statements are false.
  5. The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC.

Answer(s): D

Explanation:

The optimal capital structure is the one that maximizes the price of the firm's stock, and minimizes the firm's WACC.



Foundation Systems, a software engineering company, is considering the acceptance of two mutually exclusive projects. Assume the following information:
Project A
Initial cash outlay ($40,000)
t1: $8,000
t2: $14,000
t3: $13,000
t4: $12,000
t5: $11,000
t6: $10,000
cost of capital is 11.5%
Project B
Initial cash outlay ($20,000)
t1: $7,000
t2: $13,000
t3 $12,000
cost of capital is 11.5%
Assuming no taxes, a $0.00 salvage value at the end of each project, and the fact that both projects can be replicated identically at the end of their lives, which is the superior project according to the Common Life approach? Additionally, what is the NPV of the superior project over the common life?

  1. Project A, NPV $7,165.11
  2. Project A, NPV $9,280.90
  3. The Common Life approach cannot be applied to these two projects, due to the fact that the projects share unequal lives.
  4. Project B, NPV $9,280.90
  5. Project B, NPV $5,391.49

Answer(s): D

Explanation:

The Common Life, or "Replacement Chain" approach is a method which allows two projects with differing lives to be compared on the basis of NPV or IRR. In analyzing two or more projects using theCommon Life approach, the two projects are multiplied in such a way that each comprises the same amount of time periods.
In this example, you are provided with one project that is three periods long, and another which is six periods.
By multiplying the three-period project by two, then we are able to formulate a situation in which both projects share a "common life." The calculation of the NPV for Project B assumes the following series of cash flows:
t0: ($20,000)
t1: $7,000
t2: $13,000
t3: [$12,000 + ($20,000)]= ($8,000)
t4: $7,000
t5: $13,000
t6: $12,000
During t3, the project is "replaced," and the $12,000 inflow is offset by the ($20,000) required to implement the project once again. Incorporating this series of cash flows into your calculator will yield a NPV of $9,280.90 for project B, and this is higher than the NPV of $7,165.11 for project A.



Which of the following are objectives of conducting a post audit? Choose the best answer.

  1. Identifying arbitrage opportunities
    II. Improving forecasts
    III. Identifying expansion opportunities
    IV. Improve operations
  2. Adhering to governmental guidelines for performance presentation
  3. I, II, V
  4. I, II, III, IV
  5. I, II, VII
  6. II, IV
  7. I, II, III, IV, V
  8. I, III, IV

Answer(s): D

Explanation:

The post-audit is an important aspect of the capital budgeting process, and involves two steps. Specifically, the post audit involves comparing actual results with forecasted results and determining why any differences exist.
There are numerous specific reasons why companies conduct post-audits, but these reasons can be assimilated into two main objectives. Specifically, the objectives of the postaudit are to improve forecasting capacity and improve operations.



Viewing page 58 of 496
Viewing questions 457 - 464 out of 3963 questions



Post your Comments and Discuss Test Prep CFA-Level-I exam prep with other Community members:

CFA-Level-I Exam Discussions & Posts