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26 multiple-choice questions and 30 flashcards on Corporate Issuers, about 6% of the CFA Level I bank. Every one carries a written rationale.
Corporate Issuers is one of 10 chapters in CoStudy's CFA Level I bank, and it holds 26 of the bank's 401 multiple-choice questions — roughly 6% of the total. That proportion is not arbitrary: chapters follow the certifying body's published exam outline, and the number of questions in each is set by that domain's published weight, so the share of your practice time this chapter takes matches the share of the real exam it accounts for.
Studying by chapter is worth doing once you have a diagnostic score. A single overall percentage tells you whether you are close; it does not tell you which domain is dragging. Working a weak chapter in isolation, and re-testing it in isolation, is the fastest way to move a score that has stalled — and it is why the mock exams in CoStudy report by domain rather than as one number.
10 questions drawn from this chapter, with the full rationale shown — the controlling principle behind the right answer, and why each wrong option tempts and fails.
A firm's DTL is 4. A 10% increase in sales implies EPS will:
Answer: B — Increase by 40%
A) Divides instead of multiplying. B) Correct — DTL × %ΔSales = 4 × 10% = 40%. C) Ignores the leverage multiplier. D) Inverts the DTL ratio.
The weighted average cost of capital (WACC) formula for a levered firm is best expressed as:
Answer: C — (E/V) times rE plus (D/V) times rD times (1 minus t), reflecting the after-tax cost of debt financing
A) Omits the interest tax shield built into WACC. B) That form has no weights and no tax shield. C) Correct — after-tax cost of debt is standard. D) That form applies only the cost of equity to all capital.
Under capital rationing, the BEST tool for ranking competing projects is:
Answer: D — Profitability index, ranking NPV per dollar invested
A) Payback ignores time value and post-payback cash. B) IRR ignores project scale differences. C) Still ignores absolute NPV added. D) Correct — PI ranks value per dollar under a capital constraint.
Modigliani-Miller Proposition I, in a world with NO taxes, asserts that:
Answer: D — Capital structure is irrelevant to firm value
D) Correct — MM Prop I without taxes: levered and unlevered firm values are identical. B) Debt benefits arise only once taxes are added. C) Equity has higher required return than debt by risk order. A) Tax-shield benefits require the taxed version of MM.
Working capital is:
Answer: D — Current assets minus current liabilities
A) Confuses long-term with short-term measures. B) Working capital is a balance-sheet figure, not profit. D) Correct — standard net working capital formula. C) Inventory is only one component, not the total.
Project: $100K investment, $30K/yr for 5yrs, 10% cost of capital. Accept?
Answer: A — Accept — NPV is positive
A) Correct — NPV = −100K + 30K × 3.7908 ~ +$13,724 > 0, accept. B) Miscomputes annuity factor. C) NPV is fully determined by inputs given. D) NPV rule is sufficient; IRR isn't required.
A board's audit committee MOST appropriately consists of:
Answer: D — Independent directors with financial expertise
A) Management on the audit committee defeats oversight. B) Concentrated blockholders create governance conflicts. C) Consultants are not board members. D) Correct — independent directors provide objective oversight.
Compared to new common stock, the cost of retained earnings is MOST often:
Answer: B — Slightly lower because it avoids flotation costs
A) Retained earnings avoid, not add to, issuance costs. B) Correct — retained earnings skip flotation, so they are cheaper. C) Cost of equity exceeds the risk-free rate. D) Retained earnings still carry opportunity cost.
A 'poison pill' is a corporate-governance device that:
Answer: D — Lets shareholders buy discounted shares if threatened
D) Correct — shareholder rights plans dilute hostile bidders crossing a threshold. B) Describes proxy access, not a poison pill. C) Say-on-pay and clawbacks address compensation. A) Insider-trading rules address executive share sales.
A firm's degree of operating leverage (DOL) measures sensitivity of:
Answer: D — Operating income to a change in unit sales
A) Tax sensitivity is not what DOL captures. B) That is degree of financial leverage (DFL). C) Stock-price sensitivity relates to beta and required return. D) Correct — DOL = %ΔEBIT / %ΔSales, driven by fixed operating costs.
4 cards from the 30 in this chapter.
What is the trade-off theory of capital structure?
Firms balance the tax benefits of debt against the costs of financial distress. Optimal capital structure maximizes firm value by finding this balance.
What is the break-even point?
The level of sales at which revenues equal total costs (fixed + variable). BE = Fixed Costs / (Price − Variable Cost per Unit).
What is the clientele effect?
The tendency for different types of investors (tax brackets, income needs) to be attracted to companies with specific dividend policies.
What is the pecking order theory?
Firms prefer internal financing first, then debt, then equity last. Information asymmetry makes equity issuance signal overvaluation.
These are a sample. The full Corporate Issuers chapter runs 56 items with per-chapter progress tracking, on the web and in the iOS app.