Chartered Financial Analyst Level I Corporate Finance

1.Mara, treasurer of a millwork shop, weights equity at 60% with a cost of 10% and debt at 40%. Pretax debt cost is 6% and the tax rate is 25%, so after-tax debt cost is 4.5%. Which hurdle should she use?

2.Owen can fund only one of two projects. Both were discounted at the same cost of capital. Project A has an IRR of 18% and an NPV of 10. Project B has an IRR of 14% and an NPV of 40. Which does he accept?

3.Priya's freight line earns a 15% return on equity and pays out 40% of earnings, so it retains 60%. What sustainable growth rate should she use in the funding plan?

4.Luis, treasurer of a glassworks, sees sales rise 10% and EBIT rise 25% over the same year. What degree of operating leverage do those changes show?

5.Helen prices each crate at 20. Variable cost is 12, so contribution margin is 8, and fixed cost is 200. What accounting break-even quantity should she use?

6.Jonah uses price 20, variable cost 12, and fixed cost 200. Depreciation of 40 sits inside that 200, so cash fixed cost is 160. What cash break-even quantity should he use?

7.Adele can sell a machine today for 30 after tax. A proposed line would use that machine instead of selling it. How should she treat the 30?

8.Marcus already paid for a market survey, and the vendor will not refund it. He is building the NPV of the product the survey described. Where does the survey cost belong?

9.Nora's proposal is charged a share of head-office rent. The lease is paid whether or not the project is accepted. Is that allocated rent an incremental cost of accepting it?

10.Felix must put an extra 15 of working capital into a job at the start, and the 15 comes back when the job ends. How should he treat that 15?

11.Camille has real project cash flows and a nominal WACC. She discounts the real flows at that nominal rate. What does the mismatch do to NPV?

12.Ravi's one-year project invests 100. Pretax operating cash inflow is 40, the tax rate is 25%, and depreciation is 100, so the depreciation tax shield is 25. There is no salvage. What is operating cash flow?

13.Elena's first block of capital costs 8%. After retained earnings are used up, new equity lifts the next block to 11%. A project's IRR is 9%. When should she accept it?

14.Theo's customer pays on Monday, and the firm can use the money on Wednesday. How long is the collection float?

15.Ingrid's suppliers are due in 30 days. She is considering paying in 40 days instead. What does that stretch do to cash, and what can go wrong?

16.Samuel is offered 2% off if he pays in 10 days; otherwise the bill is due in 30. His firm can borrow at 8%. What is the approximate cost of forgoing the discount, and should he forgo it?

17.Yuki sets the order quantity at the square root of 2DS/H, balancing order costs and holding costs. If demand D doubles and the other inputs stay put, by what factor does the order quantity rise?

18.Derek expects a 2-for-1 stock split, by itself, to double the firm's equity value. What should he conclude about that expectation?

19.Lila's board cuts the regular dividend and announces no new investment plan. How are owners likely to read that cut?

20.Franco works through a Modigliani-Miller case with no taxes and no distress costs. He wants to issue debt because he thinks it will create firm value from nothing. What does that case say?

21.Beatrice's firm pays tax at 25% and expects to keep 200 of debt in place permanently. Distress costs are ignored. About how much value does the tax shield add?

22.Hassan already counts a tax shield on debt. He is deciding whether still more borrowing would help. Past some point, extra debt starts to cut firm value. What is he balancing?

23.Quinn compares two firms. Hers has volatile operating earnings and few tangible assets. The other is stable and owns plant it could sell. Other things equal, how much debt should Quinn's firm use?

24.Rosa's firm takes out a new bank loan. Business risk is the risk of operating earnings before financing. Financial risk is the extra risk from debt. Which risk does the loan add?

25.Victor's sales rise 10% and earnings per share rise 40%. What degree of total leverage do those two changes imply?

26.Amira measures a degree of operating leverage of 2 and a degree of financial leverage of 3. What degree of total leverage follows?

27.Colin's interest coverage is 1.2. A peer in the same trade covers interest 6 times. A lender calls 1.2 comfortable. What should Colin make of that remark?

28.Nadia must rank two projects. She knows NPV assumes intermediate cash flows are reinvested at the cost of capital, while IRR assumes reinvestment at the IRR. Which assumption should she rely on for the ranking?

29.Grant's project has an NPV of exactly zero at the cost of capital. A colleague says the project destroys value. Another says it adds value beyond that return. What is the right reading?

30.Sable has only 100 to invest, and the projects are divisible, so she can take fractions. One has a profitability index of 1.3 and another has 1.1. She cannot fund both in full. Which does she take first?

31.Omar is comparing a machine that lasts 3 years with one that lasts 5 years. Each NPV is for a single cycle. Why is the raw NPV comparison a poor way to choose?

32.Petra's contract lets the firm walk away and collect a known salvage if the project goes badly. Her NPV ignores that right. What does the omission do?

33.Wesley's project has an NPV of −40. An option to expand later is worth about 5, and there is no other second stage. Should he accept the project because of that option?

34.Chloe is chief executive and wants a contract that says only she can decide who holds that job. Who actually hires the chief executive and can remove that person?

35.Anton is asked to seat the chief executive's sibling as an independent director. The sibling has no other contract with the firm. Does that person qualify as independent?

36.Marisol's board is staggered, so only a portion of the seats come up for election each year. A bidder wants the whole board. What does the stagger do?

37.Hugh's firm has two share classes, and insiders hold the class with extra votes. Outside owners want to replace directors. What does that extra-vote class do?

38.Leila's firm is about to buy a warehouse from a company the chair controls. What review should happen before the purchase goes through?

39.Brent's options vest only if the share price rises, which can push him toward riskier bets. The board adds a clawback if results are restated. What is that clawback responding to?

40.Simone's firm buys a raider's block at a premium the other owners do not receive. Company cash is used to end the bid. What is that payment?

41.Pavel's firm has a poison pill. A bidder who crosses the ownership threshold is diluted. What does the pill do to a hostile bid?

42.June owns 20% of the shares, and the board has five seats. Straight voting lets a 51% holder take every seat. Which rule lets her stake seat a director?

43.Malik owns 10%. The firm denies his preemptive right and sells new shares to outsiders. He does not buy any. What happens to his fraction of the firm?

44.Estelle holds a right to buy new shares below the current market price. She lets the right expire unexercised and unsold. What does she give up?

45.Gordon buys the share on the ex-dividend date. The board declared the dividend earlier, which is when the liability was created. Does Gordon receive this dividend?

46.Hana's firm pays a cash dividend of 2. Before tax effects, about how much does the share price tend to drop on the ex-dividend date?

47.Ivan wanted cash he could spend. The firm instead declares a small stock dividend and moves fair value from retained earnings into contributed capital. What does he actually receive?

48.Cora compares a repurchase with a dividend, assuming no taxes and no information effect. She can sell a fraction of her shares into the repurchase. What can that sale do for her?

49.Rafael's tax on dividends is 30%, and his tax on capital gains is 15%. All else equal, which way of returning cash may he prefer?

50.Willa's interest coverage is 4. Borrowing to fund the next dividend would drop coverage to 1.1. Should she borrow so the dividend holds?

51.Naveen's supplier takes 1% off if he pays in 10 days; otherwise the bill is due in 30. Trade credit is free only through the discount date. What is the approximate annual cost of forgoing the discount?

52.Daphne is comparing a committed line of credit with a one-off loan. The line charges a fee on the amount she does not draw. What must the comparison include?

53.Karl's firm sells commercial paper, short-term and unsecured. The bank still asks for a backup line. What is that line there to do?

54.Aisha can factor receivables with recourse or without it. The no-recourse fee is higher. Which arrangement takes customer-default risk off her firm?

55.Lionel is pricing a lockbox. Customers would mail payments to a bank near them, and the firm would use the money sooner. What benefit does he set against the lockbox fee?

56.Freya's inventory takes 20 days, receivables take 30 days, and payables take 40 days. What is the cash conversion cycle?

57.Mateo shortens the cash conversion cycle by 10 days. Daily sales are 5. How much cash does that shortening free?

58.Bianca shifts a plant to just-in-time inventory and keeps a single supplier. Holding costs fall. What other risk should she weigh, and what makes it larger?

59.Seth holds safety stock for a part. Demand has become less predictable, and the supplier's delivery has become less reliable. What should happen to that safety stock?

60.Odette's inventory takes 20 days and receivables take 30 days. Payables take 40 days, so the cash conversion cycle is 10. What is the operating cycle?

61.Kenji converted a foreign project's cash flows at projected exchange rates, then haircut those flows for country risk and also added a country premium to the home-currency discount rate. What should he change?

62.Paula is replacing a machine. Its original cost is still on the books, and she can sell it today for a known after-tax price. Which of those two figures is sunk?

63.Ellis's new product would take 20 of after-tax margin away from an old product the firm would otherwise keep selling. How should that 20 enter the accept-or-reject decision?

64.Talia's new product brings in customers who also buy 8 of margin on the old line. Those sales would not happen without the new product. How should she treat the 8?

65.Roland's project records depreciation of 40 a year, and the tax rate is 25%. What is the yearly depreciation tax shield, and is it cash leaving the firm?

66.Mei will sell a machine for 16. Book value at the sale is 10, and the tax rate is 25%. What cash does the firm keep after tax?

67.Cyrus will sell a machine for 4. Book value is 10, and the tax rate is 25%, so the sale shows a loss of 6. What cash does the firm keep after tax?

68.Anouk recovers net working capital at the end of a project. It is cash that had been tied up in receivables and inventory already reflected in the books. How should that release enter the NPV?

69.Patrick uses the dividend growth model. The next dividend is 2, the price is 40, and growth is 5%. What cost of equity should he use?

70.Vera's old bond carries a 4% coupon. New borrowing, issued near today's price, has a 7% yield to maturity. Which rate is the pretax cost of debt for the WACC?

71.Dominic's preferred stock pays a dividend of 4, the price is 50, and the issue never matures. The dividend is not tax deductible. The corporate tax rate is 25%. What is the cost of the preferred?

72.Soren's share price jumped, so equity is 80% of capital on today's balance sheet. Policy is to rebalance to 60% equity. Which equity weight goes into the WACC?

73.Imani adds a country-risk premium to every project, including a domestic project whose customers are all domestic. What does that do to the domestic hurdle?

74.Calvin's project has a beta of 0.5. The firm as a whole has a beta of 1.2. He discounts the project at the firm WACC. What does that do?

75.Noor's project sits in a division much riskier than the firm. Its return is above the company WACC and below a rate that matches the division. What should she do?

76.Edgar can lease equipment or borrow and buy it. In this case both contracts put the obligation on the balance sheet. How should he choose?

77.Paloma has a positive-NPV project she cannot fund. A covenant limits new debt, and the legal fee to draft it was small. What is the real cost of that covenant?

78.Garrett calls a bond after rates have fallen. The firm pays the call price and refinances. Bondholders had required a call premium, or a higher yield, for that right. What is he doing?

79.Sabine's convertible bond carries a lower coupon than an otherwise identical straight bond. She calls the convertible cheap debt with no strings. What is she leaving out?

80.Tomas treats retained earnings as free capital because the firm writes no check to new shareholders. What opportunity cost do those earnings still have?

81.Rhea's project needs 100 of new equity. Issuing costs are a fee of 3. How should that fee enter the accept-or-reject decision?

82.Walter delays a vendor payment so cash on the period-end date looks higher. The cash goes out the following week. A lender reads only the period-end balance. What is the lender seeing?

83.Celeste keeps a larger cash balance and finances more of the firm with long-term debt. Defaults are rarer, and interest costs are higher. What policy is that?

84.Javier keeps less cash and funds more of the firm with short-term debt. The interest bill is lower in ordinary years. What risk does he take?

85.Miriam must fund a plant that will run for years and a seasonal inventory build that will reverse. A colleague suggests commercial paper, rolled every 30 days, for the plant. What fits?

86.Oscar's managers pass on a positive-NPV project because a failure could cost them their jobs. The board ties part of pay to long-run value. What cost is the board answering?

87.Dina's owners, already levered, want to sell safe assets and stake the proceeds on a negative-NPV gamble. The upside would be theirs and the downside would hit lenders. A covenant limits asset sales. What is it aimed at?

88.Harvey can pay a dividend that would leave too little cash for a maintenance project the plant needs. Shareholders who want the cash are vocal. What should decide the payout?

89.Lucia's shares trade at 24. A rights offer lets a holder buy one new share at 18 for every four shares held. What is one right worth?

90.Trent's right is worth 1.20. It comes from a share price of 24 and a right to buy one new share at 18 for every four held. He sells the right for 1.20 and does not subscribe. What happens to his wealth?

91.Farah's fixed cost is 200. Price falls from 20 to 18, and variable cost stays 12, so the contribution margin falls from 8 to 6. The old break-even was 25 units. What is the new accounting break-even?

92.Nolan compares a software firm, product already built and variable cost tiny, with a retailer whose costs are mostly the goods. Sales drop 10% at both. Whose operating income falls by more?

93.Greta's routes earn a 12% return on assets. New debt would cost 4% after tax. She is deciding whether borrowing to add a depot helps the owners. Does it?

94.Isaac runs a seasonal cannery. Return on assets is 3%, and the after-tax cost of a new loan is 4%. He asks whether borrowing to add a line would lift what the owners keep. What happens?

95.Yasmin's average tax rate is 15%, and her marginal tax rate is 25%. She is about to deduct the next dollar of interest in the WACC. Which rate shields that dollar?

96.Conrad's project cash flows include inflation of 2% a year. The real discount rate is 6%. He needs the nominal rate that matches those nominal flows. What is the exact nominal rate?

97.Renata builds a recession case that cuts price, volume, and the speed of collection together. A colleague calls it a one-way sensitivity. What is it actually?

98.Bennett runs a Monte Carlo draw of many inputs and gets a precise-looking histogram. The ranges he typed in were careless. What does the picture not fix?

99.Kira's project missed the cash-flow forecast. With the information available at the decision, the accept call looked reasonable. What is the post-audit for?

100.Stephen's capital budget accepts every proposal from a powerful division and rejects other proposals that have higher NPVs. Is that budget using the cost of capital?

101.Anika gets 60% of sales from one buyer. The same total spread across fifty buyers would be steadier, but her forecast is a single certain number. What should change?

102.Miles would pay 30 more than the value of the target's cash flows. Named synergies are worth 12. Should he pay that premium?

103.Odile's deal model includes one synergy: a hope that revenue will rise 20%, with no plan anyone will carry out. Should that hope be in the price she offers?

104.Raymond structures an earnout that pays the seller later if a stated target is met. The headline price is still rich versus the cash flows. What does the earnout change?

105.Sasha pays a cash price for a target and the purchase creates goodwill. In the NPV she subtracts the cash price and subtracts the goodwill again. What is wrong with that?

106.Howard's leveraged buyout repays debt by selling assets. The same assets are also the source of the operating cash flow that the model uses to repay that debt. What should he do with that version?

107.Elise's employee stock plan gets a tax advantage. The shares vote as management directs, and the plan is used to make managers harder to remove. Does the tax advantage settle the question?

108.Graham's firm holds cash equal to three years of spending. No acquisition is in sight, past bids were empire-building, and there is no tax or distress reason to hold the cash. What is the better use?