CFA Level I

Question #1 of 12 Question ID: 1210944

An analyst calculates the following leverage ratios for Burkhardt Company and Dutchin Company:

Degree of Operating Leverage Degree of Financial Leverage

Burkhardt 1.6 3.0

Dutchin 1.2 4.0

If both companies' sales increase by 5%, what are the most likely effects on the companies' earnings before interest and taxes
(EBIT) and earnings per share (EPS)?

A) Both companies’ EBIT will increase by the same percentage.

B) Dutchin’s EPS will increase by a larger percentage than Burkhardt’s EPS.

C) Burkhardt’s EBIT will increase by a larger percentage than Dutchin’s EBIT.

Question #2 of 12 Question ID: 1210939

Sutter Corp. is considering two mutually exclusive projects with the following after-tax cash flows:

TIME 0 1 2 3 4 5 6

Project 1 –10,000 2,000 2,000 2,000 4,000 4,000 4,000

Project 2 –12,000 2,000 2,000 2,000 5,000 5,000 5,000

Given that Sutter's cost of capital is 7.5%, the IRR of the project that Sutter should select is closest to:

A) 13%.
B) 15%.

C) 17%.

Question #3 of 12 Question ID: 1210945

Which of the following changes in a firm's working capital management is most likely to result in a shorter operating cycle?
 A) Reducing stock-outs by carrying greater quantities of inventory.
B) Stretching its payables by paying on the last permitted date.
C) Changing its credit terms for customers from 2/10, net 60 to 2/10, net 30.

Question #4 of 12 Question ID: 1210942

A company's operations analyst is evaluating a plant expansion project that is likely to be financed in part by issuing new
common equity. Flotation costs are expected to be 4% of the amount of new equity capital raised. The most appropriate way for
the analyst to treat the flotation costs is to:

A) ignore them, because flotation costs for common equity are likely to be nonmaterial.

B) estimate the cost of equity capital based on a share price 4% less than the current
price.

C) determine the flotation cost attributable to this project and treat it as part of the project’s
initial cash outflow.

Question #5 of 12 Question ID: 1210936

Executive directors are least likely to be included in:

A) a supervisory board.

B) a one-tier board.

C) a management board.

Question #6 of 12 Question ID: 1210937

The manufacturer of Pow Detergent has developed New Improved Pow with Dirteaters and is considering adding it to its product
line. New Improved Pow would sell at a premium price compared to Pow. In order to manufacture New Improved Pow, the firm
will need to build a new facility and purchase new equipment. Which of the following is least likely included when calculating the
appropriate cash flows for analysis of whether to add New Improved Pow to its product line?

A) Expected depreciation on the new facility and equipment for tax purposes.
B) Costs of a marketing survey performed last month to decide whether to introduce New
Improved Pow.

C) Reduced sales of Pow that result from the introduction of New Improved Pow.
Question #7 of 12 Question ID: 1210946

The use of secondary sources of liquidity would most likely be considered:

A) a normal part of daily business for a company.

B) a signal that a company’s financial position is deteriorating.

C) a lower-cost source of short-term financing compared to primary sources of liquidity.

Question #8 of 12 Question ID: 1210943

Balfour Corp. is in the food distribution business and has a beta of 1.1, a marginal tax rate of 34%, and a debt-to-assets ratio of
40%. Balfour management is evaluating an entry into the fast-casual restaurant business. They have identified a publicly traded
company in the fast-casual restaurant industry that has an equity beta of 1.3, a marginal tax rate of 28%, and a debt-to-equity
ratio of 40%. The appropriate beta for Balfour to use in calculating the cost of equity capital for the analysis of the potential entry
into the restaurant business is closest to:

A) 1.15.
B) 1.30.

C) 1.45.

Question #9 of 12 Question ID: 1210938

With regard to the internal rate of return (IRR), which of the following statements is most accurate?

A) The IRR is the discount rate that maximizes a project’s net present value.

B) A proper decision rule is to accept the project if IRR is less than the required rate of
return.

C) IRR is the discount rate at which the present value of expected future after-tax cash
flows is equal to the investment outlay.

Question #10 of 12 Question ID: 1210947

In early 20X8, a company changed its customer credit terms from 2/10, net 30 to 2/10, net 40. Comparisons of accounts
receivable aging schedules at the end of 20X7 and 20X8 follow.

20X7 20X8
Number of Days
$ millions $ millions

0–30 380 350

31–60 65 140
 61–90 41 35

Over 90 54 55

Total accounts receivable 540 580

The trends in the company's receivables indicate:

A) improved collections on credit accounts.

B) slower payments from credit customers.

C) a higher receivables turnover ratio.

Question #11 of 12 Question ID: 1210941

William Mason, CFA, is a project manager for the semiconductor division of Mammoth Industries, a conglomerate. The
semiconductor division's projected cash flows are less certain than Mammoth's overall cash flows. When determining the net
present values of projects within the semiconductor division, Mason should use:

A) Mammoth Industries’ marginal cost of capital.

B) a lower marginal cost of capital than Mammoth Industries.

C) a higher marginal cost of capital than Mammoth Industries.

Question #12 of 12 Question ID: 1210940

Isaac Segovia, CFA, is using the net present value (NPV) and internal rate of return (IRR) methods to analyze a project for his
firm. After its initial cash outflow, the project will generate several years of cash inflows, but will require a net cash outflow in the
final year. The problem Segovia is most likely to encounter when using the NPV or IRR methods for this analysis is:

A) multiple IRRs.
B) negative NPV.
C) conflicting NPV and IRR project rankings.