CFA Level I Corporate Finance practice questions
25 exam-style questions from across Corporate Finance, which is 6–9% of the Level I exam (roughly 11–16 of the 180 questions). Pick an answer to see whether you were right, why each option is right or wrong, and the lesson to go back to.
Module 1 Organizational Forms, Corporate Issuer Features, and Ownership
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1In a limited partnership, the partner with unlimited liability who usually manages the business is the:
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The answer is C.
A. Limited partners can lose only what they invested and generally leave management to the general partner. The trap
B. Shareholders belong to companies, not partnerships.
C. A limited partnership needs at least one general partner. That partner has unlimited liability and usually runs the business.
From the lesson Organizational forms of businesses
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2Five accountants want to share management of their firm while keeping their personal assets safe from claims arising from a colleague's negligence. The form that fits best is a:
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The answer is B.
A. General partners are personally liable, so one colleague's negligence could reach everyone's assets. The trap
B. In a limited liability partnership every partner has limited liability and all share management, which is typical for professional firms.
C. A sole proprietorship has a single owner, so it cannot be shared.
From the lesson Organizational forms of businesses
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3A company pays corporate tax of 20% and distributes all of its after-tax profit. Shareholders pay 15% tax on dividends. The total tax rate on the company's pre-tax profit is closest to:
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The answer is B.
A. Ignores the dividend tax.
B. 0.20 + 0.80 × 0.15 = 0.32.
C. Adds the two rates (20% + 15%). The dividend tax applies only to the 80% left after company tax. The trap
On your calculator- 1−0.2=×0.15+0.2= 0.32
- 1ENTER0.2−0.15×0.2+ 0.32
ENTER enter (on the HP, puts the number on the stack)
From the lesson Key features of corporate issuers
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4Compared with an initial public offering (IPO), a direct listing:
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The answer is C.
A. No new shares are issued in a direct listing, so no capital is raised. The trap
B. Anyone can buy shares once they list. The seller side is existing shareholders.
C. A direct listing has no underwriter and issues no new shares. Existing holders sell at a market-determined price.
From the lesson Public vs private companies, going public and going private
Module 2 Investors and Other Stakeholders
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5A company has assets of USD 500 million, debt of USD 300 million at 5% and operating profit of USD 40 million. Ignore taxes. Its return on equity is closest to:
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The answer is B.
A. This is the return on assets, 40 ÷ 500, which is the ROE of an all-equity firm.
B. Interest is 0.05 × 300 = 15. Equity is 500 − 300 = 200. ROE = (40 − 15) ÷ 200 = 12.5%.
C. Ignores the interest: 40 ÷ 200. The trap
On your calculator- 40−(0.05×300)=÷200= 0.125
- 40ENTER0.05ENTER300×−200÷ 0.125
ENTER enter (on the HP, puts the number on the stack)
From the lesson Debt vs equity: lenders and shareholders
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6Which feature applies to debt but not to equity?
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The answer is B.
A. Both debtholders and shareholders have limited liability. The trap
B. Interest is usually deductible for the issuer. Dividends are paid from profit after tax.
C. Voting rights belong to shareholders, not lenders.
From the lesson Debt vs equity: lenders and shareholders
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7Which party gains most directly from a sharp rise in a company's share price?
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The answer is C.
A. The bank is paid the same interest and principal whatever the share price. The trap
B. The supplier wants its invoice paid on time. A higher share price does not change the amount owed.
C. Share-based pay moves one for one with the share price, which is why pay is designed this way.
From the lesson Corporate stakeholders and their interests
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8Which factor would an analyst find easiest to assess and compare across companies from public filings?
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The answer is B.
A. Biodiversity effects are hard to measure and compare. The trap
B. Governance factors such as board composition and committee structure are public and quantifiable.
C. Community relations are largely qualitative.
From the lesson ESG factors investors consider
Module 3 Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
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9A chief executive teaches part-time at a university and has let two loss-making product lines drift for years without a strategic review. This is best described as:
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The answer is C.
A. Empire building means growing the business for its own sake, usually by acquisitions. Nothing was bought here.
B. Self-dealing means taking company resources for personal benefit. Teaching on the side takes none. The trap
C. The problem is too little attention to the shareholders' business: outside commitments and avoided hard decisions.
From the lesson Principal-agent problems and stakeholder conflicts
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10Founders hold 30 million Class B shares with 20 votes each. The public holds 270 million Class A shares with one vote each. The founders' share of total voting power is closest to:
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The answer is C.
A. This is the founders' economic stake: 30 ÷ 300. The trap
B. This divides 600 votes by 900, which adds the 300 million total shares to the votes and counts the founders twice.
C. Votes: 30 × 20 = 600 against 270. 600 ÷ (600 + 270) = 68.97%.
On your calculator- 30×20=STO1 600 votes
- ÷(270+RCL1)= 0.6897
STO store · RCL recall a stored number
- 30ENTER20×ENTERENTER270+÷ 0.6897
ENTER enter (on the HP, puts the number on the stack)
From the lesson Principal-agent problems and stakeholder conflicts
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11Holders of a distressed company's bonds band together to negotiate a restructuring directly with management. This group is best described as:
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The answer is B.
A. A proxy contest is a fight for votes on the board, fought by shareholders.
B. An ad hoc committee is a group of bondholders that approaches a struggling issuer with restructuring options. It does not formally represent all holders.
C. A shareholder rights plan (poison pill) is a takeover defense. The trap
From the lesson Corporate governance mechanisms
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12Which is the most likely benefit of effective corporate governance?
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The answer is B.
A. Governance relies on audit. It does not replace it.
B. Better controls, reporting and creditor protection lower default risk, so lenders ask for a lower return.
C. Governance lowers risk and the price of capital. It promises no return. The trap
From the lesson Corporate governance risks and benefits
Module 4 Working Capital and Liquidity
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13A company has days of inventory on hand of 52 days, days sales outstanding of 38 days and days payable outstanding of 41 days. Its cash conversion cycle is closest to:
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The answer is A.
A. 52 + 38 − 41 = 49 days.
B. Swaps DSO and DPO: 52 + 41 − 38.
C. Adds all three day counts instead of subtracting DPO. The trap
On your calculator- 52+38−41= 49
- 52ENTER38+41− 49
ENTER enter (on the HP, puts the number on the stack)
From the lesson The cash conversion cycle
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14A company has cash of 25, marketable securities of 15, receivables of 60, inventory of 90 and prepaid expenses of 10. Current liabilities total 120. Its quick ratio is closest to:
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The answer is B.
A. This is the cash ratio: (25 + 15) ÷ 120.
B. (25 + 15 + 60) ÷ 120 = 100 ÷ 120 = 0.83.
C. This is the current ratio: 200 ÷ 120. It includes inventory and prepaid expenses. The trap
On your calculator- 25+15+60=÷120= 0.8333
- 25ENTER15+60+120÷ 0.8333
ENTER enter (on the HP, puts the number on the stack)
From the lesson Liquidity sources and liquidity ratios
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15A firm that holds high levels of cash and inventory relative to sales and relies mainly on long-term financing follows a(n):
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The answer is A.
A. More current assets relative to sales and long-term funding are the marks of a conservative approach.
B. A moderate approach has moderate asset levels and uses short-term funding for variable needs.
C. An aggressive approach keeps current assets lean and relies on short-term funding. The trap
From the lesson Working capital management approaches
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16A supplier offers terms of 1.5/10, net 30. The effective annual cost of forgoing the discount is closest to:
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The answer is C.
A. Simple interest on the 1.5% discount: 1.5% × 365 ÷ 20. The trap
B. Simple interest on 1.5 ÷ 98.5 without compounding: 1.523% × 365 ÷ 20.
C. (1 + 1.5 ÷ 98.5)^(365 ÷ 20) − 1 = 1.0152^18.25 − 1 = 31.8%.
On your calculator- 1.5÷98.5+1=y^x(365÷20)=−1= 0.3176
y^x power
- 1.5ENTER98.5÷1+365ENTER20÷y^x1− 0.3176
ENTER enter (on the HP, puts the number on the stack) · y^x power
From the lesson Cost of trade credit
Module 5 Capital Investments and Capital Allocation
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17A new law requires a chemicals plant to fit emissions filters, and the estimated NPV of the spending is negative. The company will most likely:
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The answer is B.
A. Canceling would mean fines or losing the right to operate the plant. The trap
B. Compliance projects are imposed by a third party and are required, so they go ahead even when the NPV is negative.
C. Spending on filters does not become more valuable by waiting; the deadline is set by the rule.
From the lesson Types of capital investments
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18A project costs EUR 120 million and returns after-tax cash flows of EUR 40 million, EUR 50 million and EUR 60 million over the next three years. At a required return of 8%, its NPV is closest to:
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The answer is A.
A. −120 + 40/1.08 + 50/1.08² + 60/1.08³ = −120 + 127.53 = 7.53 (the three present values are 37.04, 42.87 and 47.63).
B. Discounts the total inflow of 150 for one period only: 150 ÷ 1.08 − 120.
C. Sums the cash flows without discounting: 150 − 120. The trap
On your calculator- CF2NDCLR WORK
- 120+|-ENTER↓40ENTER↓↓50ENTER↓↓60ENTER
- NPV8ENTER↓CPT 7.53
CF cash flow worksheet · 2ND second function (the shifted label above a key) · CLR WORK clear the worksheet · +|- change sign · ENTER enter (on the HP, puts the number on the stack) · NPV net present value · CPT compute
- fCLEAR REG
- 120CHSgCF040gCFj50gCFj60gCFj
- 8i
- fNPV 7.53
f gold shift key · CLEAR REG clear all registers · CHS change sign · g blue shift key · CF0 cash flow at time zero · CFj cash flow j · i interest rate per period · NPV net present value
From the lesson NPV and IRR in capital allocation
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19A company earns operating profit of GBP 900 million and pays tax at 20%. Long-term debt plus equity was GBP 5,600 million at the start of the year and GBP 6,400 million at the end. Its ROIC is closest to:
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The answer is B.
A. Divides by ending capital (720 ÷ 6,400) instead of the average.
B. After-tax operating profit = 0.8 × 900 = 720; average capital = (5,600 + 6,400) ÷ 2 = 6,000; 720 ÷ 6,000 = 12.00%.
C. Uses pre-tax operating profit: 900 ÷ 6,000. The trap
On your calculator- 5600+6400=÷2=STO1 6000
- 900×0.8=÷RCL1= 0.12
STO store · RCL recall a stored number
- 5600ENTER6400+2÷STO1 6000
- 900ENTER0.8×RCL1÷ 0.12
ENTER enter (on the HP, puts the number on the stack) · STO store · RCL recall a stored number
From the lesson Return on invested capital (ROIC)
Module 6 Capital Structure
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20A company is financed 40% with debt and 60% with equity at market value. Its pre-tax cost of debt is 5%, its tax rate is 20% and its cost of equity is 12%. Its WACC is closest to:
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The answer is B.
A. Swaps the weights: 0.6 × 4% + 0.4 × 12%.
B. 0.40 × 5% × 0.80 + 0.60 × 12% = 1.6% + 7.2% = 8.8%.
C. Ignores the tax shield: 0.40 × 5% + 0.60 × 12%. The trap
On your calculator- 0.4×5×0.8+(0.6×12)= 8.8
- 0.4ENTER5×0.8×0.6ENTER12×+ 8.8
ENTER enter (on the HP, puts the number on the stack)
From the lesson Weighted-average cost of capital (WACC)
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21A start-up with negative free cash flow and high business risk is most likely to fund itself with:
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The answer is B.
A. Public unsecured bonds suit mature companies with stable positive free cash flow. The trap
B. Start-ups rely on equity from founders, employees and venture capital, with leases or convertible debt as the only debt.
C. Lenders will not extend large unsecured loans against negative cash flow and high risk.
From the lesson Factors affecting capital structure and the cost of capital
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22A company's unlevered cost of capital is 11%, its cost of debt is 6% and its debt-to-equity ratio is 0.6. With no taxes, its cost of equity is closest to:
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The answer is C.
A. Uses D/V instead of D/E: 11% + 5% × 0.375.
B. Applies a tax rate of 30%: 11% + 5% × 0.7 × 0.6. There are no taxes here. The trap
C. 11% + (11% − 6%) × 0.6 = 14.0%.
On your calculator- 11−6×0.6+11= 14
- 11ENTER6−0.6×11+ 14
ENTER enter (on the HP, puts the number on the stack)
From the lesson Modigliani–Miller propositions
Module 7 Business Models
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23A founder tells an analyst: "We brew low-sugar sparkling teas from organic leaves, sell them through our own website and through convenience-store chains, and price them about 30% above supermarket soft drinks." Which element of the business model is missing from this description?
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The answer is A.
A. The description covers the product (low-sugar sparkling teas), the channels (own website and convenience stores) and the price (a premium to soft drinks), but never says who the target customers are.
B. The website and convenience-store chains are the channels, so the channel is described. The trap
C. Pricing about 30% above supermarket soft drinks is a premium pricing statement.
From the lesson Business model features
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24A company sells robotic pool cleaners near cost and earns most of its profit on replacement filter cartridges that fit only its own cleaners. This pricing is:
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The answer is C.
A. Bundling sells multiple products together, often at a discount; it is not about a cheap durable good and repeat consumables.
B. Add-on pricing sells optional extras, often to a customer who is already committed. The filters are needed to use the cleaner at all. The trap
C. A low price on the durable item and high-margin, often proprietary, consumables is the razor-razorblade model.
From the lesson Pricing and revenue models
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25A company earns commissions by connecting buyers and sellers without owning the goods. Its conventional business model is most likely:
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The answer is B.
A. A distributor buys goods and resells them, earning the spread. The trap
B. A broker connects buyers and sellers and earns commissions or listing fees.
C. A retailer sells goods to end users and earns a markup.
From the lesson Types of business models
Keep going
Study the topic module by module in the Corporate Finance lessons, look up a word in the Level I glossary, or run a timed practice set that tracks your score by topic.