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CFA Assessment Questions and Answers.
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CFA Assessment Questions andAnswers.
The cost of equity is equal to the: Answer- B. Rate of return required by stockholders
Which of the following statements is correct? Answer- B. For a given company, the after tax cost of debt is
generally less than both the cost of preferred equity and the cost of common equity
Using the dividend discount model, what is the cost of equity capital for Zeller Mining if the company will pay a
dividend of C$2.3 next year, has a payout ratio of 30%, an ROE of 15 percent, and a stock price of C$45?
Answer- C. 15.61%
Dot.Com has determined that it could issue %1000 face value bonds with an 8 percent coupon paid semi-
annually and a five year maturity at $900 per bond. If Dot.com's marginal tax rate is 38 percent, its after-tax
cost of debt is closest to: Answer- C. 6.6%
Morgan Insurance Ltd. issued a fixed rate perpetual preferred stock three years ago and placed it privately with
institutional investors. The stock was issued at $25 per share with a $1.75 dividend. If the company were to
issue preferred stock today, the yield would be 6.5%. The stock's current value is: Answer- B. $26.92
Buckco's WACC is closest to Answer- B. 9%
The Gearing company has an after tax cost of debt capital of 4 percent, a cost of preferred stock of 8 percent, a
cost of equity capital of 10 percent, and a WACC of 7 percent. Gearing intends to maintain its current capital
structure as it raises additional capital. In making its capital budgeting decisions for the average risk project, the
relevant cost of capital is: Answer- B. 7%
The weights that McClure should apply in estimating Frontier's cost of capital for debt and equity are: Answer-
Wd = .223, We = .777
, Wang Securities had a long term stable debt to equity ratio of .65. Recent bank borrowing for expansion into
South America raised the ratio to .75. The increased leverage has what effect on the asset beta and equity beta
of the company? Answer- B. the asset beta will remain the same and the equity beta will rise.
Brandon Wiene is a financial analyst covering the beverage industry. He is evaluating the impact of DEF
beverage's new product line of flavored waters. Which of the following statements is correct? Answer- B.
Using DEF's debt to equity ratio of .6 is not appropriate, but rather the debt to equity ratio of the new
product, .5 is appropriate to use in calculating the new product line's equity beta
Trumpit Resorts company currently has 1.2 million of common shares of stock outstanding and the stock has a
beta of 2.2. If trumpit raises 7.5 million of new capital while maintaining the same deb-to-equity ratio, its
WACC is closest to: Answer- B. 15.5%
Using the CAPM, Kruspa's cost of equity capital for its typical project is closest to: Answer- B. 10.52%
Sandell is interested in the WACC of Kruspa AB prior to its investing in the China project. This WACC is closest
to: Answer- B. 9.23%
In this estimation of the project's cost of capital, Sandell would like to use the asset beta of Kruspa as a base in
his calculations. The estimated asset beta of Kruspa prior to the china project is closest to: Answer- A. 1.053
Two years ago, a company issued $20 million in long term bonds at par value with a coupon rate of 9%. The
company has decided to issue an additional 20 million in bonds and expects the new issue to be priced at par
value with a coupon rate of 7%. The company has no other debt outstanding and has a tax rate of 40%. To
compute the company's weighted average cost of capital, the appropriate after tax cost of debt is closest to:
Answer- A. 4.2%
Using the DCF approach, the cost of retained earnings for the company is closest to: Answer- C. 16.8%
Using the CAPM approach, the cost of retained earnings for the company is closest to: Answer- B. 15.7%
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