CFA Institute CORPORATE FINANCE
Practice Questions
Given the project cost and the net present value, how do you find The corresponding profitability
index (PI)? - ANS 1 Plus (NPV/Project)
Comparable beta vs unlevered beta - ANS to find any beta take return - the risk free rate
divided by the market risk premium
If you have comparable beta unlevered it (by taking the tax out) to find the beta
Given par value, dividend rate, and current price, and estimated growth rate, how would you
calculate the cost of the prefered stock? - ANS (Par X dividend rate) / current price
Which of the following is most likely considered an example of matrix pricing when determining
the cost of debt?
Debt-rating approach only.
Yield-to-maturity approach only.
Both the yield-to-maturity and the debt-rating approaches. - ANS Debt-rating approach only.
using the bond-yield-plus-risk-premium approach, the percentage cost of equity is found by... -
ANS taking the time value of money to find the yield to maturity, then add the cost of debt to
calculate cost of equity
Common mistakes include after tax calculations and using the coupon rate rather than the yield
to maturity
Proponents of dual-class voting structures believe that the benefits to public shareholders most
likely include:
A) reducing conflicts of interest between management and those with economic interests.
B) trading values that are typically at a slight premium to single-class peers.
C) promoting company stability by insulating management from short-term investor pressures. -
ANS promotes company stability by insulating management from short-term investor pressures.
The post-audit performed as part of the capital budgeting process is least likely to include the:
provision of future investment ideas.
rescheduling and prioritizing of projects.
, indication of systematic errors. - ANS rescheduling and prioritizing of projects.
capital budgeting steps - ANS Step One: Generating Ideas
Step Two: Analyzing Individual Proposals
Step Three: Planning the Capital Budget
Step Four: Monitoring and Post-auditing
Which of the following is least likely to be a component of a developing country's equity
premium?
A) Annualized standard deviation of the developing country's equity index
B) Sovereign yield spread
C) Annualized standard deviation of the sovereign bond market in terms of the developing
country's currency - ANS
The optimal capital budget for a firm is best described as occurring when the company's
marginal cost of capital is:
equal to the investment opportunity schedule.
less than the investment opportunity schedule.
greater than the investment opportunity schedule. - ANS equal to the investment opportunity
schedule.
Given the estimated costs of debt, preferred stock, and common stock and tax rate, how would
you calculate the weighted cost of capital? (WACC) - ANS Multiply the cost of debt to tax rate
(1-tax rate) + other stocks then divide that by the amount of stock classes
Which of the following statements describes the most appropriate treatment of cash flows in
capital budgeting?
Interest costs are included in the project's cash flows to reflect financing costs.
A project is evaluated using its incremental cash flows on an after-tax basis.
Sunk costs and externalities should not be included in the cash flow estimates. - ANS A project
is evaluated using its incremental cash flows on an after-tax basis.
Only sunk costs should be ignored in a project's cash flow estimation, but not any externalities.
Financing costs like interest costs are excluded from calculations of operating cash flows. If
financing costs are included, we would be double-counting these costs.
Given an initial investment for a project, amount of increase from the project each year in
perpetuity, and a negative NPV, How do you calculate the IRR? - ANS 0 = (Initial investment) +
(Increased cash flow/ IRR
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