CFA Level I Corporate Finance

When should a company accept an independent project?

A positive NPV adds value at the required return.

A project costs 100 today and returns 60 at the end of years 1 and 2. At 10%, what is its NPV?

60/1.1 + 60/1.21 − 100 = 54.55 + 49.59 − 100.

NPV and IRR rank two mutually exclusive projects differently. Which should you follow?

NPV assumes reinvestment at the cost of capital and measures value directly.

A firm is 60% equity at 10% and 40% debt at a 5% pre-tax cost. The tax rate is 25%. What is its WACC?

0.6 × 10% + 0.4 × 5% × (1 − 0.25) = 6% + 1.5%.

The risk-free rate is 3%, the market return is 8% and beta is 1.2. What is the cost of equity under the CAPM?

3% + 1.2 × (8% − 3%).

A project costs 100 and returns 30 a year. What is its payback period?

100 / 30. Payback ignores the time value of money and later cash flows.

Under Modigliani-Miller with corporate taxes, the value of a levered firm is:

The interest tax shield adds value; without taxes, capital structure doesn't matter.

What does the pecking order theory say about financing?

Issuing equity can signal that managers think shares are overvalued.

A company with high operating leverage has:

Financial leverage comes from debt; operating leverage from fixed operating costs.

Days inventory is 60, days sales outstanding is 45 and days payables is 30. What is the cash conversion cycle?

60 + 45 − 30.

Which board practice usually strengthens corporate governance?

Separating the CEO and chair roles also helps oversight.

What is the principal-agent problem in a company?

Pay linked to long-term value and board oversight reduce it.

Stakeholder theory says a company should consider:

Shareholder theory focuses on maximising shareholder value.

A company buys back shares with borrowed money at an after-tax cost below its earnings yield. EPS will:

Earnings yield = EPS / price. Buying back is accretive when it costs less than that yield.

Which is a primary source of liquidity?

Secondary sources, such as selling assets or renegotiating debt, can change the business.

What does ESG stand for?

ESG factors are increasingly part of investment analysis.