CFA Level I Corporate Finance Practice Questions
Corporate Finance makes up 4 of every 50 questions on a Tigertest CFA Level I practice test. Here are 10 of the 16 questions on it, each with the answer and the reason.
Updated by the Tigertest team. Based on CFA Institute's Level I topic weights for 2027. Original questions with four choices (the real exam has three). Not affiliated with CFA Institute.
1. A project costs 1,000 today and returns 400 at the end of each of the next three years. At a 10% cost of capital its NPV is closest to:
- A.-95
- B.-5
- C.+5
- D.+200
Answer: B. NPV = -1,000 + 400 x [1 - 1.10^-3] / 0.10 = -1,000 + 994.7 = -5.3, so the project should be rejected. +200 ignores discounting.
2. Two mutually exclusive projects rank differently by NPV and by IRR. The company should choose the project with the:
- A.Shorter payback
- B.Lower initial cost
- C.Higher IRR
- D.Higher NPV
Answer: D. NPV measures the value added in currency and assumes reinvestment at the cost of capital, so it is the better guide when the two rules conflict on mutually exclusive projects.
3. A project costs 1,000 and returns 300, 400 and 500 at the end of years 1 to 3. Its payback period is:
- A.2.6 years
- B.2.3 years
- C.2.4 years
- D.3.0 years
Answer: A. After two years 700 has been recovered and 300 remains. Year 3's 500 covers it in 300/500 = 0.6 of a year, so payback is 2.6 years.
4. A company finances itself with 40% debt and 60% equity. The pretax cost of debt is 6%, the tax rate 25% and the cost of equity 11%. Its WACC is:
- A.7.8%
- B.8.5%
- C.8.4%
- D.9.0%
Answer: C. WACC = 0.40 x 6% x (1 - 0.25) + 0.60 x 11% = 1.8% + 6.6% = 8.4%. Using the pretax cost of debt gives 9.0%.
5. The risk-free rate is 3.5%, a stock's beta is 1.2 and the equity risk premium is 5%. Under the CAPM its cost of equity is:
- A.8.5%
- B.5.3%
- C.9.5%
- D.6.0%
Answer: C. Cost of equity = 3.5% + 1.2 x 5% = 9.5%. The 5% is already a premium over the risk-free rate; treating it as the market return gives 5.3%.
6. A company's degree of operating leverage is 3.0. If sales rise by 4%, operating income should rise by about:
- A.12%
- B.7%
- C.1.3%
- D.4%
Answer: A. DOL = % change in EBIT / % change in sales, so EBIT changes by 3.0 x 4% = 12%. High fixed costs magnify the effect of sales changes on operating income.
7. Which view of the corporation holds that managers should consider the interests of employees, suppliers and communities, not only shareholders?
- A.Pecking order theory
- B.Shareholder theory
- C.Agency theory
- D.Stakeholder theory
Answer: D. Stakeholder theory widens the firm's objective to all groups with an interest in it. Shareholder theory makes maximizing shareholder value the main goal.
8. Managers who build an empire through acquisitions that raise their pay but destroy shareholder value illustrate a:
- A.Market timing problem
- B.Principal-agent conflict
- C.Creditor-shareholder conflict
- D.Cumulative voting problem
Answer: B. Shareholders (principals) and managers (agents) have different interests. Pay tied to firm size rather than value can encourage value-destroying growth.
9. Cumulative voting in board elections most benefits:
- A.Company managers
- B.Minority shareholders
- C.Controlling shareholders
- D.Senior bondholders
Answer: B. Cumulative voting lets a shareholder cast all votes for one director, so a minority can elect at least some board members. Straight voting lets the majority fill every seat.
10. A supplier offers terms of 2/10, net 30. The effective annual cost of not taking the discount is closest to:
- A.37.2%
- B.27.9%
- C.24.8%
- D.44.6%
Answer: D. Skipping the discount means paying 2/98 more for 20 extra days: (1 + 2/98)^(365/20) - 1 = 44.6%. 37.2% is the simple annualized figure and 27.9% uses 30 days instead of 20.
Practice all 16 corporate finance questions, and the rest of the 200-question bank, in the free CFA Level I training sets. Questions you miss come back until you have mastered them.
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