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Corporate Finance - Sample Question CFA L1


Rahul Gupta (Project Controller ACA MBA(Fin.))     17 May 2010

Rahul Gupta
Project Controller ACA MBA(Fin.) 
 1101 likes  8004 points

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Corporate Finance Sample Questions

 


1) Which one of the following statements can be made about a company that has no fixed interest payment obligations?

A) Its degree of financial leverage will be 1.0, which means that the company will have no financial risk.
B) Its degree of financial leverage will be less than 1.0 if the company  charges interest on its overdue receivable accounts.
C) Its degree of financial leverage will be more than 1.0 if the company  charges interest on its overdue receivable accounts.
D) Its degree of financial leverage will be zero, which means that the company bears no financial risk whatsoever.
________________________________________________________________________
2) Which of the following
statements contradicts the likely outcomes as a result of the "clientèle effect"?

A) Low dividend paying stocks will tend to attract investors in higher tax brackets.
B) Clients prefer dividends because they are more certain than the potential for capital gains in the future; a cut in dividends will result in a negative clientele effect.
C) Stocks with no internal growth will tend to attract investors who prefer high dividends.
D) Different groups of investors have different preferences for dividends; if a firm changes its dividend policy, it will lose one group of investors and simultaneously attract another group, keeping its share prices stable.
______________________________________________________________________
3) Which of the following
statements with respect to risk analysis techniques is untrue?

A) Sensitivity analysis illustrates the impact on the dependent variable by only changing one independent variable, while holding all other independent factors constant.
B) Monte Carlo simulation will run the greatest number of scenarios, with each scenario having nothing held constant.
C) Scenario analysis requires the calculation of a few possible outcomes, which is followed by the assignment of probabilities of these various outcomes actually occurring.
D) The advantage that a Monte Carlo analysis has over the other techniques is that it does away with the need to assign subjective probabilities to the various random variables.
________________________________________________________________________

4) Which of the following statements about cash flow and accounting profit are true?


I. In theory, if the life of a company was finite, the sum of its total undiscounted cash flows should equal the sum of its profit over this period.
II. For a company that has many depreciable assets, its operating cash flows are always higher that its accounting profit.
III. Accounting profit is more reliable than cash flows because cash flows look at all items that involve cash, whereas profits only look at income and expense items.
IV. During a high growth phase of a company, it is very common to see high profits when, in fact, their cash flows are negative.


A) I, II and IV only
B) IV only
C) I, II, III and IV
D) II and IV only
________________________________________________________________________

5) Your company is currently analyzing the launch of a new division, which is expected to generate the following cash flows:

Year   Cash Flow
  0      ($750,000)    
  1       $300,000
  2       $250,000
  3       $118,000
  4       $375,000
  5       $502,000

If the required rate of return on this project is 11%, what is its IRR? Should the company undertake this project?

A) The IRR equals 26.69% and, therefore, the project should be undertaken.
B) The IRR equals 19.3% and, therefore, the project should be undertaken.
C) The IRR equals 19.3% and, because this required return is greater than the original required return of 11%, the project should be rejected.
D) The IRR equals 26.69% and, because this required return is greater than the original required return of 11%, the project should be rejected.


____________________________________________________________________________________________

6) Which of the following statements with respect to the use of an appropriate discount rate is true?

I. A company should use its weighted average cost of capital (WACC) for all projects as the discount rate because WACC is roughly how much it costs to finance all of the projects.
II. A company should use WACC as the benchmark discount rate; however, for projects that are risky, WACC should be reduced to reflect the riskiness of the project.
III. The company should use WACC as the discount rate only for projects that exhibit a risk level that is similar to the risk level of the company as a whole.
IV. The rate used to discount a project depends solely on how risky that project is; the discount rate should in no way be influenced by how much it cost for the company to raise capital.


A) I and IV only
B) III and IV only
C) II and III only
D) III only
 _____________________________________________________________________________________________

7) Which of the following statements about the Modigliani and Miller capital structure propositions are true?

I. In the absence of taxes, the value of the firm is in no way impacted by its capital structure.
II. In the absence of taxes, the weighted average cost of capital will be constant for all levels of debt/equity ratios.
III. With taxes, the value of a firm is maximized when its capital structure is entirely made up of equity.
IV. With taxes, the weighted average cost of capital is minimized when the capital structure is made up entirely of debt.


A) I and IV only
B) III and IV
C) I, II, III and IV
D) I, II and IV only
 _____________________________________________________________________________________________

8) Which of the following statements about capital budgeting is true?

I. Capital budgeting is the process of deciding which projects to undertake.
II. Capital budgeting dictates that all projects with positive NPVs should be undertaken, since these projects all yield a return that is higher than what is required.
III. Capital budgeting requires that the present value of a project's profits be in excess of its up-front costs.
IV. Proper capital budgeting will result in the maximization of shareholder value.


A) I, II, III and IV
B) II and IV only
C) I, III and IV only
D) I and IV only
______________________________________________________________________

9) The market value of XYZ Corp.'s common equity is currently $600 million and the market value of its debt is $400 million. The cost of equity is estimated at 12% and the before-tax cost of debt is estimated at 8%. Suppose that the company wishes to raise an additional $150 million to finance its expansion; it estimates the debt will now cost them 9% (before tax) and the equity will cost 14%. The company's tax rate is 40%. If the company wishes to maintain its existing capital structure, what will the company's new WACC and marginal cost of capital be?

A) New WACC: 10.56%      Marginal cost of capital: 1.44%
B) New WACC:  9.12%      Marginal cost of capital: 15.3%
C) New WACC: 10.56%      Marginal cost of capital: 15.8%
D) New WACC:  12.0%      Marginal cost of capital: 14.7%
_________________________________________________________________________
 10) Question:
Which of the following statements is least accurate with respect to the impact operating leverage will have on the financial profile of a company?

A) A high operating leverage is evident if a greater proportion of a firm's cost structure is fixed.
B) As operating leverage increases, a small percentage change in sales will have a bigger impact on EBIT.
C) As operating leverage increases, a small percentage change in EBIT will have a bigger impact on net income.
D) The higher the operating leverage of a company, the higher will be the sales break-even point.

Best of luck




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