Level I CFA Quiz 1

8/10/2019 Level I CFA Quiz 1

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Level I Corporate Finance Quiz 1 Irfanullah.co

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1. An investor is looking to invest in Silver Appliances. It has a beta of 1.2 and is funded 60% with

debt. The company recently announced that it would retire all of its debt and become debt-free.The investor is interested in calculating the beta of the firm, assuming that the firm has no debt.If the marginal tax rate is 40%, the beta of the company without any debt is closestto:

A.

0.44B.

0.63

C.

0.74

2.

A 30-day $10,000 U.S. Treasury bill sells for $9,850. The discount-basis yield (%) is closest to:A.

17.50%

B. 18.00%C. 18.25%

3. Which of the following capital budgeting techniques is mostdirectly related to the stock price? A. Payback PeriodB. Discounted Payback Period

C.

Net Present Value

4.

For a company, the fixed costs are $15,000, interest costs are $5,000 and taxes are $4,000. If the

price per unit is $15 and the variable cost per unit is $7, the operating breakeven (in units) isclosest to:

A.

1,000

B. 1,875C. 2,500

5. The following information is available for a company:

Bonds are priced at par and they have an annual coupon rate of 7%.

Preferred stock is priced at $15 and it pays an annual dividend of $2.25.

Common equity has a beta of 1.5. The risk-free rate is 5% and the market risk premium is 12%.

Capital structure: Debt = 35%; Preferred stock = 10%; Common equity = 55%

The tax rate is 35%.

The weighted average cost of capital (WACC) for the company is closest to:

A. 15.00%B.

15.74%

C. 16.60%

6. Using the income statement below, the degree of financial leverage is closest to:

Income Statement $ millions

Revenues 17

Variable Operating Costs 4.5

Fixed Operating Costs 3.5


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Operating Income 9

Interest 3

Taxable Income 6

Tax 2

Net Income 4

A.

0.80B. 1.50

C.

2.25

7. Which of the following is most likely not considered in the capital budgeting process?

A. ExternalitiesB.

Timing of cash flowsC.

Sunk costs

8. Which of the following approaches is least likelyto be used to estimate the cost of debt: A. Debt-Rating Approach Only

B.

Yield to Maturity Approach OnlyC. Discounted Free Cash Flow Approach

9.

A companys $100 par value preferred stock with a dividend rate of 15% annually is currentlypriced at $112. The companys growth rate is expected to be 5% annually for the next 7 years.The companys cost of preferred stock is closest to:

A. 13.4%B.

14.1%C. 15%

10.A companys taxable income is 20% of sales. Assuming taxes of 35% and a retention ratio of

70%, the net profit margin is closest to:A. 7%B. 13%C. 30%

11.A 30-day $10,000 U.S. Treasury bill sells for $9,950. The money-market yield (%) is closest to:A. 6.0%

B.

6.5%C.

7.0%

12.A 10-year $1,000 fixed rate non-callable bond with 7% annual coupons currently sells for $1,154.

Assuming an additional risk premium for equity relative to debt of 7% and a 35% marginal taxrate, the cost of equity using the bond-yield-plus-risk-premium approach is closestto:

A. 9.5%B. 12.0%C. 14.0%


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13.A company buys items from its suppliers on credit, with trade credit terms of 3/10 net 40. The

company is evaluating the different costs of trade credit for paying the supplier on different days.If the company pays the supplier on the 30th day, the annualized cost of trade credit (%) closestto:

A.

74%B.

85%

C.

91%

14.

Which is least likely to be a component of a developing countrys equity premium:A.

Annualized standard deviation of developed market equity index

B. Sovereign yield spreadC. Annualized standard deviation of the sovereign bond market in terms of the developed

market currency

15.A project has the following annual cash flows:

Year 0 1 2 3

Cash Flow ($) -23,000 15,000 8,000 7,000

Using a discount rate of 5%, the discounted payback, in years, is closestto:

A.

2.0 yearsB.

2.2 yearsC. 2.5 years

16.If a companys stock trades at relatively high prices, the company would least likely consider theuse of:

A. Stock DividendB. Reverse Stock SplitC. Stock Split

17.Based on best practices in corporate governance procedures, which of the following is least likelyconsidered a best practice in corporate governance procedures:

A.

Have independent board members comprise a minority proportion on the board B. Have separation of the CEO position from the chair position on the board C. Link compensation to long term objectives of the company

18.

Which of the following is most likelyconsidered a secondary source of liquidity: A. Working Capital Loans

B. Trade Credit from SuppliersC. Liquidation of Assets

19.Business risk of a company most likely incorporates sales risk andA. Financial RiskB. Foreign Exchange Risk

C.

Operating Risk


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20.A project has the following annual cash flows:

Year 0 1 2 3

Cash Flow ($) -800 200 550 300

Which discount rate most likelygives a negative net present value?

A.

11%B.

13%

C.

15%

21.

A companys information is provided below:

Current Price Per Share $30

Total Shares Outstanding 20,000

Book Value Per Share $20

If the company decides to repurchase $90,000 worth of shares using cash, the book value per share

most likely will:A. Decrease

B. IncreaseC.

Remain unchanged

22.The following information is available for a firm:

Number of shares outstanding 7 million

Tax rate 35%

Cost of debt (pretax) 8%

Current stock price $10.00

Net income $14 million

If the company buys back $21 million worth of shares using debt, the earning per share most likely

will:A. DecreaseB. Increase

C. Remain Unchanged

23.The following cash flows are determined for a project:

Year 0 1 2 3 4 5

Cash Flow -500 50 90 150 350 400

If the required rate of return for the project is 10%, the NPV of the project is closestto:

A. S181B. $220

C. $540


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24.

An analyst gathers the following information about a company and the market

Current market price per share of

common stock

$79

Most recent dividend per share

paid on common stock

$11

Expected dividend payout rate 40%

Expected return on equity (ROE) 20%

Beta for the common stock 1.8

Expected return on the market

portfolio

10%

Risk-free rate of return 6%

The cost of common equity for the company, according to the dividend-discount model approachwould be closestto:

A.

25.9%B. 23.0%C. 27.6%

25.Given the following financial statement data,

$ millions

Credit Sales 50,000

Cost of Goods Sold 35,000

Average A/R 7,000

Inventory BeginningBalance

4,000

Inventory Ending Balance 7,000

Average Accounts Payable 3,000

Using average balances for A/R, inventory and A/P, the net operating cycle is closestto:

A.

79.6 DaysB. 137.3 Days

C. 108.5 Days

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Level I CFA Quiz 1