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

CFA-Level-I: CFA® Level I Chartered Financial Analyst
Free Practice Exam Questions (page: 59)
Updated On: 2-Jan-2026

Page 59 of 496
PDF with 3963 Questions

In an investigation of Clay Industries, Marcus Litton, a financial analyst, has determined the following information:
Sales: $300,000,000
Fixed costs: $100,000,000
Variable costs: $115,200,000
Interest expense: $1,800,000
Tax rate: 35%
Weighted Average Cost of Capital: 10.15%
Beta coefficient: 0.80
Common shares outstanding: 10,000,000
Mr. Litton has asked for your assistance in determining the earnings per share (EPS) of Clay Industries. Using this information, which of the following answers correctly illustrates this EPS calculation?

  1. $2.91
  2. $6.17
  3. $6.80
  4. The EPS figure cannot be completely determined from the information provided.
  5. $4.90
  6. $5.40

Answer(s): F

Explanation:

The EPS figure is perhaps the single most popular term in the field of conventional equity investments. Any glance into financial media and business periodicals will undoubtedly uncover numerous instances in which the EPS figure is cited. While quite popular and useful, many individuals do not understand the mechanics behind the EPS calculation, and an investigation into the components of EPS is a valuable learning experience. The EPS calculation is found by the following equation: {EPS = [(Sales - Fixed Costs - Variable Costs - Interest Expense)(1 - Tax Rate)] / [# of Common Shares Outstanding]} Additionally, the EPS figure can be found by:
{EPS = [(EBIT - Interest Expense)(1 - Tax Rate) / # of Common Shares Outstanding]} Incorporating the given information into the first EPS equation will yield the following: {EPS = {[($300,000,000 - $100,000,000 - $115,200,000 - $1,800,000)(1 - 0.35)] / 10,000,000]} = $5.40.



Howell Enterprises is forecasting EPS of $4.00 per share for next year. The firm has 10,000 shares outstanding, it pays 12 percent interest on its debt, and it faces a 40 percent marginal tax rate. Its estimated fixed costs are $80,000 while its variable costs are estimated at 40 percent of revenue. The firm's target capital structure is 40 percent equity and 60 percent debt and it has total assets of $400,000. On what level of sales is Howell basing its EPS forecast?

  1. $105,280
  2. $292,444
  3. $1,000,000
  4. $480,400
  5. $316,722

Answer(s): B

Explanation:

EPS = (Sales - Fixed costs- Variable costs - Interest)(1 - T)/Shares outstanding.
Step 1 Calculate interest expense
Debt = 0.60 x $400,000 = $240,000.
Interest = 0.12 x $240,000 = $28,800.
Step 2 Solve for Sales (S)
EPS = $4.00 = (S - 0.40S - $80,000 - $28,800) x (1 - 0.40)/10,000 = (0.60S - $108,800)(0.6)/10,000
$4.00 = (0.36S - $65,280)/10,000
$105,280 = 0.36S
Sales = $292,444.44.
Alternative method
EPS = (EBIT - Interest)(1 - T)/Shares outstanding.
Solve for EBIT
Net Income = EPS x Shares outstanding = $4.00 x 10,000 = $40,000.
EBT = NI/(1 - T) = $40,000/(0.6) = $66,667.
Interest (from above) = $28,800.
EBIT = EBT + Interest = $66,667 + $28,800 = $95,467.
S = 0.40S + $95,467 + $80,000
0.6S = $175,467
S = $175,467/0.6 = $292,445.



An increase in the tax rate ________ the optimal debt-to-equity ratio. It ________ the after-tax cost of debt.
Assume all else equal.

  1. this answer cannot be generated because "tax" is not a factor in the optimal debt-to-equity ratio
  2. increases; increases
  3. this answer cannot be generated because "tax" is not a factor in after-tax cost of debt
  4. decreases; increases
  5. increases; decreases
  6. decreases; decreases

Answer(s): E

Explanation:

Since interest payments are tax deductible, higher tax rates make debt more attractive relative to equity, increasing the optimal D/E ratio. The after-tax cost of debt decrease, assuming that the pre-tax cost of debt is not affected by the change in the tax rate (in reality, it could increase due to decreased profitability of the firm and the resultant decrease in its solvency).



The internal rate of return of a capital investment

  1. changes when the cost of capital changes.
  2. must exceed the cost of capital in order for the firm to accept the investment.
  3. is equal to the annual net cash flows divided by one half of the project's cost when the cash flows are an annuity.
  4. all of the answers are correct.

Answer(s): B

Explanation:

The IRR is calculated by finding the discount rate that equates the present value of future cash inflows to the project's cost. The IRR is the project's expected rate of return. If the IRR exceeds the cost of the funds used to finance the project, a surplus accrues. Thus, accepting a project whose IRR exceeds its cost of capital increases shareholder wealth.



A stock has a beta of 1.1 and the risk-free rate is 5.5%. Its dividend growth rate is 4.1% and the dividend payout ratio is 38%. If the market risk premium is 7.3%, the P/E ratio of the stock equals ________.

  1. 7.19
  2. 6.73
  3. 3.86
  4. 4.03

Answer(s): D

Explanation:

The required rate of return on the stock can be found using CAPM, which gives Rstock = k = Rf + beta*(Rm - Rf) = 5.5% + 1.1*7.3% = 13.53%. Therefore, P0/E1 = dividend payout/(k - g) = 0.38/(0.1353 - 0.041) = 4.03.



Davis Corporation is faced with two independent investment opportunities. The Corporation has an investment policy, which requires acceptable projects to recover all costs within 3 years. The Corporation uses the discounted payback method to assess potential projects and utilizes a discount rate of 10 percent. The cash flows for the two projects are:
Time Project A Project B
0-100,000-$80,000
140,000 50,000
240,000 20,000
340,000 30,000
430,000 0
Which investment project(s) does the company invest in?

  1. Project B only.
  2. Project A only.
  3. Neither Project A or Project B.
  4. Project A and Project B.

Answer(s): A

Explanation:

The sum of the PVs of the t = 1, t = 2, and t = 3 cash flows at t = 0 for Project A is $99,474.08. Thus, the discounted payback period of Project A exceeds 3 years and Project A is not acceptable. The PVs of the t = 1, t = 2, and t = 3 cash flows at t = 0 for Project B are $45,454.55, $16,528.93, and $22,539.44, respectively. These PVs sum to $84,522.92, which is greater than the cost of the project, indicating that the discounted payback period is less than 3 years. Thus, Project B will be undertaken.



The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net working capital of $2,000. The computer would increase the firm's before-tax revenues by $20,000 per year but would also increase operating costs by $5,000 per year. The computer is expected to be used for 3 years and then be sold for $25,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 14 percent. What is the net investment required at t = 0?

  1. -$36,600
  2. -$40,000
  3. -$38,600
  4. -$42,000
  5. -$37,600

Answer(s): D

Explanation:

Initial investment:
Cost($40,000)
Change in NWC(2,000)
($42,000)



A financial analyst is examining shares of Floweration.com, a sprawling Internet "dot com" company, in an attempt to evaluate the firm for possible investment. In her analysis, the financial analyst has determined the following information for the most recent fiscal year:
Sales $2,250,000
Total fixed cost $1,300,000
Total variable cost $305,000
Interest expense $5,750
EBIT $645,000
Amortization expense $4,550
Given this information, what is the Degree of Total Leverage for Floweration.com?

  1. 2.843
  2. 3.064
  3. 1.731
  4. 3.488
  5. 3.043

Answer(s): E

Explanation:

The Degree of Total Leverage (DTL) demonstrates how a given change in sales will impact a firm's EPS. The equation used for calculating the DTL is as follows: {[Sales - variable costs] / [sales - variable costs - fixed costs
- interest expense]}. Incorporating the given values for these components into the DTL equation yields the following: {[Sales $2,250,000 - variable costs $305,000] / [sales $2,250,000 - variable costs $305,000 - fixed costs $1,300,000 - interest expense $5,750]}=3.043. While somewhat intuitively appealing, "EBIT" and "amortization expense" are not explicitly incorporated into the DTL equation.



Viewing page 59 of 496
Viewing questions 465 - 472 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