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CFA Level I Corporate Finance & Portfolio Management Calculation Practice with Answers

Practice 50 CFA Level I Corporate Finance & Portfolio Management calculation questions with answers and detailed explanations. Test your knowledge of key concepts, review step-by-step solutions, and strengthen your understanding of essential formulas and calculations for the CFA exam.

Question 1
The following information has been provided for two funds an investor is researching:
| Investment | Return | Beta |
| ———- | —— | —- |
| Kappa Fund | 9% | 1.1 |
| Gamma Fund | 14% | 2.9 |
If the risk-free rate is 3%, the difference in Treynor ratios between the two funds is:
Question 2
Beta Corporation provides the following data regarding cash flows for a capital project:
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
| ——— | ——–: | ——-: | ——: | ——-: | ——-: | ——: |
| Cash flow | –$32,000 | $19,000 | $6,000 | $12,000 | $14,000 | $3,000 |
If Beta Corporation’s required rate of return is 6%, the project’s net present value (NPV) is:
Question 3
The bond equivalent yield for a 91-day US Treasury bill that has a price of $9,850 per $10,000 face value is:
Question 4
Shelley’s portfolio has a realized return of 16%. The realized return of the S&P 500 for
the same time period is 18%, and the risk-free rate is 6%. If the beta of Shelley’s portfolio
is 0.75, the portfolio’s alpha is:
Question 5
Gamma Corporation has a debt-to-equity ratio of 0.09, an asset beta of 1.95, and a marginal tax rate of 30%. If the risk-free rate is 4.5% and the equity risk premium is 6%, the cost of equity capital is:
Question 6
Anthony’s investment of $200 produces the following cash flows:
Year 1: $80
Year 2: $110
Year 3: $120
If the required rate of return is 12%, the investment’s net present value (NPV) is:
Question 7
The following information relates to questions 7 – 8.
Delta Corporation provides the following information regarding its corporate bank account:
Total deposits forthe month $18,938,374
Number of days in month 30
Average daily float $946,900
Based on the information provided, the average daily deposit for Delta Corporation’s
bank account is:
Question 8
Based on the information provided, the float factor for Delta Corporation’s bank account is:
Question 9
Epsilon Corporation has a current ratio of 3.0 and a quick ratio of 2.5. If the company’s current liabilities are $80,000, the amount of inventory is:
Question 10
Zeta Fund has a Treynor ratio of 4.71. If the fund’s return is 11%, and the risk-free rate is 2%, the fund’s beta is:
Question 11
Marie’s investment of $200,000 produces a perpetual after-tax cash flow of $8,000. If her required rate of return is 5%, the investment’s profitability index is:
Question 12
Richard, a portfolio manager, assembles the following portfolio consisting of two securities:
| Security | Security Weight (%) | Expected Standard Deviation (%) |
| — | — | — |
| Security A | 45 | 9 |
| Security B | 55 | 7 |
If the standard deviation of the portfolio is 7.9%, the covariance between the two securities is:
Question 13
The following information relates to questions 13 – 14.
Theta Corporation is investing $900,000 in a new production facility. The present value of the future after-tax cash flows is estimated to be $950,000. Theta Corporation currently has 80,000 outstanding shares with a current market price of $14.00 per share.
Based on the information provided, the value of Theta Corporation after the investment is:
Question 14
Based on the information provided, the value of Theta Corporation’s share price after the investment is:
Question 15
Kappa stock pays a constant dividend of $5 per share each year, and the dividend is not expected to increase. If the required rate of return is 10%, the current value of Kappa stock is:
Question 16
Lambda Corporation plans to borrow enough money to repurchase 80,000 shares of stock. The following information relates to the share repurchase:
Shares outstanding before buyback 2.5 million
Earnings per share before buyback $2.25
Share price at time of buyback $46.50
After-tax cost of borrowing 9%
Lambda Corporation’s earnings per share (EPS) after the buyback will be:
Question 17
Assume the next dividend for Omikron stock will be $3 per share, and investors require a 12% rate of return to purchase the stock. If the dividend increases by 4% each year, the current value of the stock is:
Question 18
Assuming the risk-free rate is 3.5%, if Sigma Corporation’s equity beta is 0.8 and equity risk premium is 5.9%, then the cost of equity capital is:
Question 19
Omega Corporation’s taxable income is 19.3% of sales. Assuming taxes of 38% and a
dividend payout of 50%, the company’s net profit margin is:
Question 20
The following information relates to questions 20 – 21.
Alpha Inc. provides the following information at their annual shareholder meeting:
| | Current Year | Next Year’s Forecast |
| — | — | — |
| **Book value of debt** | $48,000 | $54,000 |
| **Market value of debt** | $75,000 | $79,000 |
| **Book value of shareholders’ equity** | $66,000 | $70,000 |
| **Market value of shareholders’ equity** | $310,000 | $325,000 |
Based on the information provided, the weight that should be applied in estimating Al- pha Inc.’s cost of capital for debt is:
Question 21
Based on the information provided, the weight that should be applied in estimating Alpha Inc.’s cost of equity is:
Question 22
If Gamma Fund’s Sharpe ratio is 0.76, its standard deviation is 9%, and the risk freerate is 3.5%, the fund’s return is:
Question 23
Beta Inc. has the following capital structure: 25% debt, 20% preferred stock, and 55% equity. The company would like to maintain these proportions as it raises new capital. Its before-tax cost of debt is 6%, its cost of preferred stock is 12%, and the cost of equity is 13%. If Beta Inc.’s marginal tax rate is 35%, the weighted average cost of capital is:
Question 24
Delta Inc. will pay a dividend of $4.50 next year and has a payout ratio of 25%. If its return on equity is 10%, and the stock price is $70, then according to the dividend discount model, the cost of equity capital is:
Question 25
Epsilon Inc. has interest-bearing debt of $12 million carrying an 8% interest rate. If the company is subject to a tax rate of 30%, the after-tax cost of debt is:
Question 26
The following information relates to questions 26 – 28.
Zeta Manufacturing Company provides the following information for the fiscal year:
Number of units produced and sold 300,000
Sales price per unit $250
Variable cost per unit $95
Fixed operating cost $6,200,000
Fixed financing expense $1,400,000
The degree of operating leverage at unit sales of 300,000 is:
Question 27
The degree of financial leverage at unit sales of 300,000 is:
Question 28
The breakeven quantity of unit sales is:
Question 29
George, an investment analyst, has provided the following information for two newly formed mutual funds:
| Mutual Fund | Time Since Inception | Return Since Inception (%) |
| — | — | — |
| **Theta Fund** | 211 days | 3.98 |
| **Kappa Fund** | 14 months | 8.11 |
The difference in the annualized rate of return between the two mutual funds is:
Question 30
The discount interest for a security valued at $65,000 that pays 3.3% interest with five months remaining to maturity is:
Question 31
The following information relates to questions 31 – 32.
Linda, an investment analyst, is reviewing a security valued at $500,000 that pays 6.25% interest with two months remaining to maturity.
The security has a current value of:
Question 32
If the discount security is purchased at its current value and held to maturity, the yield on the investment is:
Question 33
Lambda Inc. provides the following information for the fiscal year:
Sales $44,350,000
Cost of goods sold $12,500,000
Average inventory $1,500,000
Lambda Inc.’s inventory turnover is:
A: 3.55.
Question 34
If Omikron Inc. has a dividend payout ratio of 60% and a return on equity of 12.2%, then its sustainable growth rate is:
Question 35
A security has an expected return of 7.2% and a beta of 0.95. If the risk-free rate is 2.5%, then the expected return for the market, according to the capital asset pricing model, is:
Question 36
Sigma Inc.’s balance sheet shows an accounts payable balance of $625,000. If the amount of purchases is $5,550,000, the number of days of payables is:
Question 37
Alpha Investment Company has an 8.4% required rate of return. Their analysts are researching a stock that is expected to pay a dividend of $5.15 per share. If the dividend is expected to increase by 3.3% each year, the current value of the stock is:
Question 38
The following information relates to questions 38 – 39.
William, an investment manager, researches the historic geometric returns for the following asset classes:
| Asset Class | Geometric Return (%) |
| — | — |
| **Common stocks** | 7.2 |
| **High-yield bonds** | 5.8 |
| **T-bills** | 1.9 |
| **Inflation** | 3.3 |
Based on the information provided, the real rate of return for common stocks is:
Question 39
Based on the information provided, the real rate of return for high-yield bonds is:
Question 40
A security has an expected annual return of 9.5% and an expected standard deviation of 14.4%, The market has an expected annual return of 7.8% and an expected standard deviation of 12.2%. If the correlation between the security and the market is 0.75, then the security’s beta is:
Question 41
A share of Gamma preferred stock has a par value of $100 and a preferred dividend rate of 6.25%. If the required return is 11.5%, the price per share is:
Question 42
Omega Inc. has 790,000 shares of common stock outstanding and pays a cash dividend of $2.45 per share. If the earnings per share (EPS) is $6.17, then the dividend payout
ratio is:
Question 43
Beta Trading Company provides the following information for the fiscal year:
Sales $850,000
Depreciation $120,000
Average net income $150,000
Average book value $400,000
Tax rate 30%
Based on the information provided, Beta Trading Company’s average accounting rate of return (AAR) is:
Question 44
Omikron Holding Company’s capital structure includes debt with an average duration of five years. Their credit rating is AA+, and the yield on debt with the same debt rating and similar duration is 6.5%. If the company’s marginal tax rate is 40%, then Omikron Holding Company’s after-tax cost of debt is:
Question 45
The Delta Fund has an expected return of 8.5% and a standard deviation of 18.3%. If an investor’s risk aversion coefficient is 2, the utility of the investment is:
Question 46
A foreign government’s 10-year bond has a yield of 6.6%. A similar maturity US Treasury bond has a yield of 3.4%. The annualized standard deviation of the foreign equity index is 19%, and the annualized standard deviation of the foreign dollar-denominated 10-year government bond is 11%. The country risk premium for the foreign country is:
Question 47
The following information relates to questions 47 – 48.
Epsilon Holdings, a large multinational corporation, acquires Zeta Manufacturing Company for $40 million. As a result of the acquisition, Epsilon Holdings’ standard deviation is reduced from 42% to 27%, and its correlation with the market decreases from 0.89 to 0.68. Assume the standard deviation and return of the market remains unchanged at 19% and 8%, respectively.
The beta of Epsilon Holdings before the acquisition was:
Question 48
The beta of Epsilon Holdings after the acquisition is:
Question 49
The discount interest for a security valued at $100,000 that pays 5.8% interest with three months remaining to maturity is:
Question 50
Theta Co. issues bonds paying a 6% coupon, with a yield-to-maturity of 8.46%. If the company’s marginal tax rate is 28%, then its after-tax cost of debt is: