Level I CFA Quiz 1 Solutions

8/10/2019 Level I CFA Quiz 1 Solutions

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Level I Corporate Finance Quiz 1 Answers Irfanullah.co

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1: B

60% debt financing is equivalent to a D/E ratio of 1.50 = 0.60/(10.60).Asset= EQ [1 (1 + [1t] D/E) )] = 1.2 x [1 (1+ [0.6] 1.5) = 0.631Asset Beta is unlevered beta; it reflects the business risk of the assets. It is the beta of a company without anydebt. Equity beta is levered beta. It takes into account the leverage that a firm uses.

2: B

DBY = [(Face ValuePurchase Price) / Face Value] x [360/Days to Maturity]= [(10,0009,850)/10,000] x [360/30] = .18 = 18%

3: CNPV criterion is most directly related to the stock price. If a company invests in positive NPV projects, theseshould add to the wealth of its shareholders.

4: B

The Operating Breakeven in units = Fixed Costs/Contribution MarginContribution Margin = Price per unitVariable costs per unitOperating Breakeven = 15,000/(157) = 1,875 unitsOperating Breakeven is the number, in terms of units sold, at which the companys operating income is zero.

A company reaches this point when it covers its variable and fixed costs. Financial breakeven is the number,in terms of units sold, at which the companys net income is zero. A company reaches this point when all itsexpenses are covered.

5: B

=d(1) d++ = 7% because the yield to maturity on a par value bond is the coupon rate of the bond= /= 2.25/15 = 15%= 5 + Beta[() ] = 5% + 1.5[12%] = 23%=d(1) d+ += (0.35 x 0.65 x 0.07) + (0.1 x 0.15) + (0.55 x 0.23) = 15.74%

6: BDFL = (Q(PV)F) / (Q(PV)FC) = (Operating income) (Operating incomeInterest expense).DFL = 9 (93) = 1.5

7: CSunk costs are not considered because these are the costs which have been made and cannot be recovered.

8: C

Debt-Rating and Yield to Maturity approaches and used to estimate the cost of debt. Free cash flowapproaches are generally used to value an overall firm or the value of equity.

9: A

rp= Dp/ Pp= (100 x 0.15) / 112 = 13.4%

10: B

Net profit margin = Net income Sales = [Earnings before tax (1Tax rate)] SalesNet profit margin = Net income Sales = [(0.2 x Sales) 0.65] Sales = (0.13 x Sales) Sales = 0.13 =13%


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19: C

Business risk is combination of sales risk and operating risk.

20: CUsing a financial calculator, enter the following cash flows:CF0 = -800, CO1 = 400, CO2 = 550 and CO3 = 300. Press NPV, enter the discount rates, and press CPT

NPV.

Discount Rate NPV ($)

11% 45.9

12% 15.615% -12.95

Another approach to solving this question would be finding the IRR for the project. If the discount rate isgreater than the IRR, the NPV would be negative.CF0 = -800, CO1 = 400, CO2 = 550 and CO3 = 300. Press IRR and then press CPT. The IRR is 14.07%.Since 15 is the only option greater than 14.07%, C is the answer.

21: A

Total Book Value = Number of Shares Outstanding x BV per share = 20,000 x 20 = 400,000Total Number of Shares Repurchased = 90,000/30 = 3,000BV After Repurchase = 400,00090,000 = 310,000

New BV Per Share = 310,000/(20,000-3,000) = 18.23

22: B

Current Earnings per Share= Net Income/Total Shares Outstanding = 14,000,000/7,000,000 = $2Number of shares repurchased = 21,000,000/10 = 2,100,000The next step is to find out adjusted net income:

Method A Method B

Increase in Interest Paid = New Debt x InterestRate = 21,000,000 x .08 = 1,680,000

Adjusted Net Income =Current Income [Debt x Cost of Debt x (1-

T)]= 14,000,000[21,000,000 x .08 x 0.65]= 14,000,0001,092,000=12,908,000

Reduction in Taxes = Interest Paid x Tax Rate= 1,680,000 x 0.35 = 588,000

Adjusted Net Income = Net Income Pre-Repurchase Interest Paid + Reduction inTaxes= 14,000,000 1,680,000 + 588,000 =12,908,000

New Earnings per share = 12,908,000/4,900,000 = 2.63The earnings per share has increased.

23: B

Using a financial calculator, enter the following cash flows:CF0 = -500, CO1 = 50, CO2 = 90, CO3 = 150, CO4 = 350, CO5 = 400, Press NPV, Enter I = 10, CPT NPV.

NPV = $219.69

24: C

Cost of common equity = (D1/P0)+ gg = ROE (1Dividend Payout Rate) = 0.2 x( 1- 0.4) = 0.12


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D1= D0x (1+ g) = 11 x (1.12) = 12.32Cost of Common Equity = (12.32/79) + 0.12 = 27.6%

25: AInventory Turnover = COGS/Average Inventory = 35,000/(4,000 + 7,000)/2 = 6.36

Number of Days of Inventory = 365/Inventory Turnover = 365/6.36 = 57.4Receivables Turnover = Credit Sales/Average Receivables = 50,000/7,000 = 7.14

Number of Days of Receivables = 365/Receivables Turnover = 365/7.14 = 51.1Purchases = COGS + Increase in inventory = 35,000 + 7,0004,000 = 38,000Payables Turnover = Purchases/Average Payables = 38,000/3,000 = 12.67

Number of Days of Payables = 365/Payables Turnover = 365/12.67 = 28.8Net Operating Cycle = Number of Days of Inventory + Number of Days of ReceivablesNumber of Daysof Payables = 57.4 + 51.128.8 = 79.6

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Level I CFA Quiz 1 Solutions