CFA Corporate Finance
Past Questions
18+ verified Corporate Finance past questions for CFA. Step-by-step worked answers in 5 Nigerian languages.
Corporate Finance topics (2)
Sample Corporate Finance past questions
1. NPV = present value of cash inflows −:
- A. Tax
- B. Initial outlay
- C. Interest
- D. Wages
Answer: B
2. WACC stands for:
- A. Weighted Avg Cost of Capital
- B. World Acc Cap Co
- C. Worst Avg Cost Calc
- D. Weekly Acct Cost
Answer: A
AI Explanation
**The reasoning** WACC is a fundamental finance and accounting acronym that every business student must know. It stands for **Weighted Average Cost of Capital** — the average rate a company pays to finance its assets, calculated by weighing the cost of debt and equity according to their proportions in the company's capital structure. Think of it this way: If a company raises ₦100 million (₦60M from loans at 10% interest and ₦40M from shareholders expecting 15% returns), the WACC blends these costs based on their weights: (0.6 × 10%) + (0.4 × 15%) = 12%. This 12% tells investors the minimum return the company must earn to satisfy all stakeholders. **Why the wrong options tempt you** Options B, C, and D are complete nonsense — they're designed to catch students who panic and guess random combinations of words starting with W, A, C, C. "World Acc Cap Co" and "Weekly Acct Cost" sound vaguely business-related but mean nothing in finance terminology. **Quick takeaway** WACC = Weighted Average Cost of Capital — it's the company's overall cost of funding, blending debt and equity costs. Master this term; it appears everywhere in corporate finance!
3. The cost of equity is typically estimated using the:
- A. Payback method
- B. CAPM
- C. FIFO
- D. Straight line
Answer: B
4. NPV stands for Net Present:
- A. Value
- B. Volume
- C. Variance
- D. Velocity
Answer: A
5. WACC stands for Weighted Average Cost of:
- A. Capital
- B. Cash
- C. Credit
- D. Companies
Answer: A
6. Cost of equity is typically estimated using:
- A. YTM of bonds
- B. CAPM (Capital Asset Pricing Model): Rf + β(Rm − Rf)
- C. Cost of debt × tax rate
- D. Dividend yield only
Answer: B
AI Explanation
CAPM is the most common method; Ri = Rf + β(Rm − Rf).
7. If a project's NPV is positive, the company should:
- A. Reject it
- B. Accept it (it adds value)
- C. Wait
- D. Refer to government
Answer: B
AI Explanation
Positive NPV creates shareholder value — accept (with no capital rationing constraints).
8. Beta measures:
- A. Total risk
- B. Systematic risk relative to the market
- C. Specific risk
- D. Inflation risk
Answer: B
AI Explanation
Beta = sensitivity of a stock's return to market return. Market β = 1; β > 1 more volatile than market.
9. Capital budgeting decision rule using IRR:
- A. Accept if IRR > required rate of return
- B. Accept if IRR = 0
- C. Always reject
- D. Maximise IRR only
Answer: A
AI Explanation
Accept project if its IRR exceeds the hurdle rate (cost of capital).
10. Working capital equals:
- A. Total assets − total liabilities
- B. Current assets − current liabilities
- C. Cash only
- D. Long-term debt
Answer: B
AI Explanation
Working capital measures short-term liquidity = CA − CL. Positive is generally healthy.
11. Operating leverage refers to:
- A. Use of debt
- B. Use of fixed costs in operations — increases profit sensitivity to sales changes
- C. Cash flow
- D. Bond ratings
Answer: B
AI Explanation
High operating leverage = high fixed costs → small sales changes cause large profit swings.
12. Financial leverage refers to:
- A. Use of fixed operating costs
- B. Use of debt financing — magnifies ROE
- C. Working capital
- D. Inventory turnover
Answer: B
AI Explanation
Financial leverage uses borrowed funds to amplify returns to equity holders. Higher debt = higher leverage.
13. Dividend Discount Model (DDM): P₀ = D₁ / (r − g) is known as:
- A. Black-Scholes
- B. Gordon Growth Model
- C. CAPM
- D. Fama-French
Answer: B
AI Explanation
Gordon Growth Model assumes constant dividend growth g indefinitely. Requires r > g.
14. Capital structure refers to:
- A. Office layout
- B. The mix of debt and equity used to finance a firm
- C. Inventory levels
- D. Number of shareholders
Answer: B
AI Explanation
Capital structure = proportion of debt vs equity in financing. Optimal mix minimises WACC.
15. If risk-free rate = 4%, market return = 10%, beta = 1.5, cost of equity (CAPM) is:
- A. 10%
- B. 13%
- C. 15%
- D. 19%
Answer: B
AI Explanation
Re = 4 + 1.5(10 − 4) = 4 + 9 = 13%.
16. After-tax cost of debt for a 10% coupon and 30% tax rate:
- A. 10%
- B. 7%
- C. 3%
- D. 13%
Answer: B
AI Explanation
After-tax cost = pretax × (1 − tax) = 10% × 0.70 = 7%.
17. Modigliani-Miller (no taxes) propositions imply:
- A. Capital structure matters greatly
- B. Capital structure is irrelevant to firm value in a perfect market
- C. Equity is always better
- D. Debt is always better
Answer: B
AI Explanation
MM Proposition I (no taxes): firm value depends only on operating cash flows, not capital structure.
18. A 'sunk cost' should be treated in capital budgeting as:
- A. Relevant
- B. Irrelevant — already incurred regardless of decision
- C. Subtracted twice
- D. Tax-deductible
Answer: B
AI Explanation
Sunk costs are past and unrecoverable — ignored in incremental cash-flow analysis.
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