Free CFA Level I Corporate Issuers Practice Questions
Corporate issuers on the CFA Level I exam tests corporate governance, capital structure decisions, working capital management, and cost of capital estimation. Weighted 6-9% (CFA Institute).
Sample Questions
Question 1
Easy
A project's net present value (NPV) represents:
Solution
C is correct.
NPV is calculated by discounting all expected future cash flows at the required rate of return and subtracting the initial investment. A positive NPV means the project adds value to the firm.
NPV is calculated by discounting all expected future cash flows at the required rate of return and subtracting the initial investment. A positive NPV means the project adds value to the firm.
Question 2
Medium
The cash conversion cycle measures the time between:
Solution
A is correct.
The cash conversion cycle (CCC) measures the number of days between paying suppliers for inventory and receiving cash from customers. It equals days of inventory on hand plus days of sales outstanding minus days of payables outstanding.
The cash conversion cycle (CCC) measures the number of days between paying suppliers for inventory and receiving cash from customers. It equals days of inventory on hand plus days of sales outstanding minus days of payables outstanding.
Question 3
Hard
A supplier offers credit terms of 1/15, net 45. A buyer's short-term borrowing rate is 6% per year. What should the buyer do, and why?
Solution
A is correct.
The annualized cost of forgoing the discount = [0.01 / (1 - 0.01)] x [365 / (45 - 15)] = [0.01 / 0.99] x [365 / 30] = 0.01010 x 12.17 = 12.3%. Since 12.3% exceeds the company's 6% borrowing rate, it is cheaper to borrow at 6% and take the discount.
The annualized cost of forgoing the discount = [0.01 / (1 - 0.01)] x [365 / (45 - 15)] = [0.01 / 0.99] x [365 / 30] = 0.01010 x 12.17 = 12.3%. Since 12.3% exceeds the company's 6% borrowing rate, it is cheaper to borrow at 6% and take the discount.