CFA Exam Question of the Day

Level I | Level II | Level III

2022-12-02

Question:
Hert Corporation acquired a capital lease that is carried on its books at a present value of $100,000 (discounted at 13%). Its annual rental payment is $15,000.

What is the amount of interest expense from this lease?

 First YearSecond Year
I.13,00011,050
II.13,000 12,740
III.13,00013,000
IV.15,00015,000


Select an Answer:
II
III
I
IV
Rationale:
For the first year, the interest expense = $100,000 × .13 = $13,000.

The balance of the lease after the first year = $100,000 − ($15,000 − $13,000) = $98,000.

For the second year, the interest expense = $98,000 × .13 = $12,740.

The balance of the lease after the second year = $98,000 − ($15,000 − $12,740) = $95,740.

2022-12-01

Question:
If ABC Company pays its copy machine service agreement in advance, how will its balance sheet be affected?

Select an Answer:
One asset will be reduced and one asset will increase.
One asset will be reduced and shareholder's equity will increase.
One asset will increase and one liability will increase.
One asset will be reduced and one liability will increase.
Rationale:
Paying a service agreement in advance will reduce cash and increase prepaid expenses - both of which are assets.

2022-11-30

Question:
A firm's dividend growth rate is 3.2% when the dividend payout ratio equals 37%. It is expected to pay a dividend of $2.2 next year.

If the cost of external equity for the firm equals 19.2% and the firm's stock is currently priced at $14.1, the flotation cost of equity equals ________.

Select an Answer:
0.89%
1.91%
1.78%
2.50%
Rationale:
If F is the percentage flotation cost and P is the amount of new equity raised per new share, then:

Ke = [D1 / P0(1 − f)] + g

where Ke is the cost of external equity. Here, g = 3.2%, D1 = $2.2, P = $14.1, and Ke = 19.2%.

Therefore, 19.2% = 2.2 / (14.1 × (1 − F)) + 3.2%. Solving for F gives F = 2.5%.

2022-11-29

Question:
If a stock has an expected dividend payout ratio of 50%, a required rate of return of 13%, and an expected growth rate for dividends of 9%, what is the P/E ratio?

Select an Answer:
8.5
none of these answers
12.5
10
Rationale:
The P/E ratio is calculated as:

P/E = (D1/E) / (k − g)

In this case:

P/E = 0.5 / (0.13 − 0.09) = 12.5

2022-11-28

Question:
At December 31, 20x2, Vega Corp. owed notes payable of $1,750,000, due on May 15, 20x3. Vega expects to retire this debt with proceeds from the sale of 100,000 shares of its common stock.

The stock was sold for $15 per share on March 10, 20x3, prior to the issuance of the year-end financial statements.

In Vega's December 31, 20x2 balance sheet, what amount of the notes payable should be excluded from current liabilities?

Select an Answer:
$1,750,000
$250,000
$1,500,000
$0
Rationale:
If the firm intends to refinance short-term obligations on a long-term basis and demonstrates an ability to consummate the refinancing, the obligation should be excluded from current liabilities and reclassified as noncurrent.

The ability to consummate the refinancing may be demonstrated by a post-balance-sheet-date issuance of long-term obligations or equity securities.

Therefore, $1,500,000 (100,000 × $15) of the notes payable should be excluded from current liabilities and reclassified as noncurrent.