CFA Level I subject

Corporate Issuers practice questions

Corporate Issuers questions cover capital budgeting, cost of capital, leverage, working capital, governance, and corporate structure. This section currently includes 99 public practice questions across 19 topic modules, with explanations, formulas, traps, and key takeaways.

Indicative public exam weight: 6-9%. Start with a topic guide when you need focused review, or use adaptive mode for mixed practice and due reviews.

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Business Models

12 public questions with explanations, formulas, and exam traps.

Capital Allocation: NPV versus IRR

1 public question with explanations, formulas, and exam traps.

Capital Investments and Capital Allocation

14 public questions with explanations, formulas, and exam traps.

Capital Structure

12 public questions with explanations, formulas, and exam traps.

Cash Conversion Cycle

1 public question with explanations, formulas, and exam traps.

Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

12 public questions with explanations, formulas, and exam traps.

Cost of Preferred Stock

1 public question with explanations, formulas, and exam traps.

ESG and Stakeholders

1 public question with explanations, formulas, and exam traps.

Governance Mechanisms

1 public question with explanations, formulas, and exam traps.

Investors and Other Stakeholders

12 public questions with explanations, formulas, and exam traps.

Organizational Forms and Ownership

1 public question with explanations, formulas, and exam traps.

Organizational Forms, Corporate Issuer Features, and Ownership

12 public questions with explanations, formulas, and exam traps.

Principal-Agent and Governance

1 public question with explanations, formulas, and exam traps.

Real Options

1 public question with explanations, formulas, and exam traps.

ROIC and Business Models

1 public question with explanations, formulas, and exam traps.

Shareholder versus Creditor Incentives

1 public question with explanations, formulas, and exam traps.

WACC

1 public question with explanations, formulas, and exam traps.

Working Capital and Liquidity

13 public questions with explanations, formulas, and exam traps.

Working Capital Policy

1 public question with explanations, formulas, and exam traps.

Easy

Corporate Issuers

Business Models

A new meal-kit company enters a crowded market with prices set well below cost, planning to raise prices after it builds a large subscriber base and lowers unit costs through scale. This pricing approach is best described as:

Moderate

Corporate Issuers

Business Models

An online marketplace connecting freelance designers with small businesses becomes more valuable to each business as more designers join, and more valuable to each designer as more businesses join. This characteristic is best described as:

Moderate

Corporate Issuers

Business Models

A hotel company sells its owned properties and shifts to franchising its brand and managing hotels owned by third parties in exchange for fees. Compared with its previous model, the new model most likely results in:

Moderate

Corporate Issuers

Business Models

Lumen Health sells its home diagnostic device at a price below production cost and earns high margins on the single-use proprietary test cartridges that the device requires. The cartridges are sold separately as customers need them. This pricing approach is best described as:

Easy

Corporate Issuers

Business Models

A firm's value proposition is best described as:

Easy

Corporate Issuers

Business Models

A pricing model most accurately describes:

Easy

Corporate Issuers

Business Models

Comprehensive business model analysis most likely addresses customers, offerings, channels, and:

Moderate

Corporate Issuers

Business Models

An unconventional business model is best described as one that:

Moderate

Corporate Issuers

Business Models

When analyzing a complex business model, an analyst should most appropriately:

Easy

Corporate Issuers

Business Models

Digitalization most likely changes a business model by enabling:

Moderate

Corporate Issuers

Business Models

A company shifts from one-time hardware sales to subscription-based software. The most accurate analytical implication is that the change may:

Easy

Corporate Issuers

Business Models

A firm that outsources manufacturing but controls design, branding, and customer data has most likely changed its:

Moderate

Corporate Issuers

Capital Allocation: NPV versus IRR

Project A costs 100 and pays 135 in one year. Project B costs 1,000 and pays 1,250 in one year. The cost of capital is 10%, and projects are mutually exclusive. The most appropriate choice is:

Easy

Corporate Issuers

Capital Investments and Capital Allocation

A company plans to build a distribution hub on land it already owns. The land was purchased years ago for 1 million and could be sold today for 4 million. In the project's NPV analysis, the land is most appropriately:

Moderate

Corporate Issuers

Capital Investments and Capital Allocation

Lucia Ferreira, CFO of Andean Beverages, evaluates a bottling line costing 250,000 that is expected to produce after-tax operating cash flows of 90,000 at the end of each of the next four years, with no salvage value. At a 12% required rate of return, the NPV of the bottling line is closest to:

Moderate

Corporate Issuers

Capital Investments and Capital Allocation

Two mutually exclusive projects have conventional cash flows, and each has a positive NPV at the firm's 10% required return. Project X has the higher NPV, while Project Y has the higher IRR. The most appropriate decision is to accept:

Very Difficult

Corporate Issuers

Capital Investments and Capital Allocation

Hassan Idris evaluates a project for Sahel Agro that requires an initial outlay of 160,000 and is expected to return after-tax cash flows of 88,000 at the end of year 1 and 96,800 at the end of year 2. The project's IRR is closest to:

Very Difficult

Corporate Issuers

Capital Investments and Capital Allocation

Meridian Power can invest in a wind project today with an NPV of 60,000. Alternatively, it can wait one year for a regulatory ruling: with 60% probability the ruling is favorable and the project's NPV at that time will be 200,000; with 40% probability it is unfavorable and the NPV at that time would be -150,000, in which case the company will NOT invest. Using a 10% discount rate, the value of waiting relative to investing today is closest to:

Easy

Corporate Issuers

Capital Investments and Capital Allocation

For an independent project, the most appropriate decision rule using net present value is to accept the project when NPV is:

Easy

Corporate Issuers

Capital Investments and Capital Allocation

The internal rate of return is best described as the discount rate that:

Moderate

Corporate Issuers

Capital Investments and Capital Allocation

A project requires an initial outlay of 100,000 and is expected to generate 40,000 at the end of each of the next three years. Using a 9% discount rate, the NPV is closest to:

Moderate

Corporate Issuers

Capital Investments and Capital Allocation

A feasibility study completed last year for 60,000 should most appropriately be treated in current project analysis as:

Moderate

Corporate Issuers

Capital Investments and Capital Allocation

A project will generate annual revenue of 500,000 and cash operating costs of 310,000. Annual depreciation is 80,000 and the tax rate is 25%. Annual after-tax operating cash flow is closest to:

Moderate

Corporate Issuers

Capital Investments and Capital Allocation

A project has an outflow of 500,000 today and inflows of 175,000 at the end of each of the next four years. The IRR is closest to:

Very Difficult

Corporate Issuers

Capital Investments and Capital Allocation

A company will replace old equipment that can be sold today for 70,000 and has a book value of 50,000. New equipment costs 260,000 and requires 30,000 of additional net working capital. The tax rate is 25%. The initial outlay is closest to:

Very Difficult

Corporate Issuers

Capital Investments and Capital Allocation

A project requires equipment costing 400,000 and an immediate net working capital investment of 50,000. It will generate annual after-tax operating cash flow of 140,000 for four years. At the end of year 4, equipment with zero book value will be sold for 40,000 and NWC will be recovered. The tax rate is 25% and the required return is 10%. The NPV is closest to:

Very Difficult

Corporate Issuers

Capital Investments and Capital Allocation

A project has an NPV of -2 million without flexibility. Management can pay 0.5 million today for an option to abandon the project if demand is weak, and this option is valued at 3 million. The most appropriate investment conclusion is:

Easy

Corporate Issuers

Capital Structure

Under Modigliani-Miller Proposition I with corporate taxes, and assuming no costs of financial distress, increasing the proportion of debt in a company's capital structure most likely:

Moderate

Corporate Issuers

Capital Structure

Orinoco Chemicals has a target capital structure of 30% debt, 10% preferred stock, and 60% common equity. Its before-tax cost of debt is 7.0%, its cost of preferred stock is 6.5%, its cost of common equity is 12.0%, and its marginal tax rate is 21%. The company's WACC is closest to:

Moderate

Corporate Issuers

Capital Structure

A mature company with ample internal cash flow announces a large seasoned offering of common shares to fund routine projects. According to pecking order theory, investors are most likely to interpret the announcement as a signal that:

Very Difficult

Corporate Issuers

Capital Structure

Calloway Marine has increased leverage steadily for several years. Its CFO argues that because the after-tax cost of debt remains below the cost of equity, issuing additional debt to retire equity must keep lowering the company's WACC. According to static trade-off theory, this argument is most likely flawed because:

Easy

Corporate Issuers

Capital Structure

The weighted-average cost of capital is most accurately described as the:

Easy

Corporate Issuers

Capital Structure

The cost of debt used in WACC is most appropriately measured on an after-tax basis because:

Moderate

Corporate Issuers

Capital Structure

A company has target market-value weights of 40% debt and 60% equity. Its pretax cost of debt is 6%, cost of equity is 11%, and marginal tax rate is 25%. WACC is closest to:

Moderate

Corporate Issuers

Capital Structure

A firm has debt with book value of 300 million and market value of 360 million. Equity has book value of 500 million and market value of 840 million. Pretax cost of debt is 5%, cost of equity is 10%, and tax rate is 20%. Using market-value weights, WACC is closest to:

Moderate

Corporate Issuers

Capital Structure

Under Modigliani-Miller propositions with no taxes, no bankruptcy costs, and perfect capital markets, increasing leverage most likely:

Moderate

Corporate Issuers

Capital Structure

Static trade-off theory suggests the optimal capital structure is reached when:

Easy

Corporate Issuers

Capital Structure

According to pecking order considerations, a manager with information asymmetry concerns is most likely to prefer financing new investments first with:

Moderate

Corporate Issuers

Capital Structure

A company with an 8% WACC is evaluating a project in a much riskier business than its existing operations. The most appropriate hurdle rate is:

Moderate

Corporate Issuers

Cash Conversion Cycle

A company has inventory 80, receivables 60, payables 45, annual COGS 400, and annual sales 600. Using 365 days, the cash conversion cycle is closest to:

Easy

Corporate Issuers

Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

CEO duality is best described as a situation in which the chief executive officer:

Moderate

Corporate Issuers

Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

A say-on-pay provision most likely strengthens corporate governance by:

Moderate

Corporate Issuers

Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

A technology company lists Class A shares carrying one vote each, while its founders retain unlisted Class B shares carrying twenty votes each. For outside Class A investors, the most likely governance concern is that:

Very Difficult

Corporate Issuers

Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

An activist fund with broad shareholder support launches a proxy contest at Veldt Industrials, whose nine-member board is divided into three classes, with one class standing for election each year. Even if the activist's nominees win every seat contested at the next annual meeting, the most likely outcome is that the activist:

Easy

Corporate Issuers

Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

A principal-agent relationship is created when:

Easy

Corporate Issuers

Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

Corporate governance is best described as a system of:

Easy

Corporate Issuers

Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

A covenant limiting additional borrowing is most likely intended to protect:

Moderate

Corporate Issuers

Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

The board of directors is most appropriately responsible for:

Moderate

Corporate Issuers

Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

Executive compensation tied to long-term value creation most likely reduces agency conflict by:

Easy

Corporate Issuers

Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

Managers possess favorable private information about a project but communicate only vague projections to outside investors. The governance issue most directly illustrated is:

Very Difficult

Corporate Issuers

Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

A board approves a major project after management forecasts unusually high demand. The board performs no independent review, management bonuses are based on first-year revenue, and the project later destroys value. The most appropriate governance improvement is:

Easy

Corporate Issuers

Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

A company ignores repeated employee safety concerns and later faces shutdowns, litigation, and reputational damage. The outcome is best classified as:

Moderate

Corporate Issuers

Cost of Preferred Stock

Preferred stock pays an annual dividend of 4.80 and trades at 60. Debt yields 7%, and the tax rate is 30%. Cost of preferred stock is closest to:

Moderate

Corporate Issuers

ESG and Stakeholders

An analyst includes water scarcity, worker safety, tailings-dam governance, and board independence in a credit review of a mining issuer. The most accurate treatment of these ESG factors is that they:

Moderate

Corporate Issuers

Governance Mechanisms

A board creates an independent audit committee, requires disinterested approval of related-party transactions, and links executive pay to multi-year ROIC above WACC instead of revenue growth. These changes most directly reduce:

Easy

Corporate Issuers

Investors and Other Stakeholders

Compared with an investor holding a company's senior bonds, an investor holding the same company's common shares most likely has:

Moderate

Corporate Issuers

Investors and Other Stakeholders

An analyst is grouping issues for an ESG assessment of a global apparel manufacturer. Which of the following issues is most likely classified as a social factor?

Moderate

Corporate Issuers

Investors and Other Stakeholders

Under shareholder theory, a corporation's spending on employee wellness programs is most appropriately justified when the spending:

Very Difficult

Corporate Issuers

Investors and Other Stakeholders

Marek Holdings, a highly leveraged issuer whose bonds trade at distressed levels, sells a profitable division and, at the urging of its largest shareholders, pays the entire proceeds out as a special dividend rather than repaying debt. The company's bond prices fall on the announcement. The conflict illustrated is best described as:

Easy

Corporate Issuers

Investors and Other Stakeholders

A debtholder's financial claim is best described as:

Easy

Corporate Issuers

Investors and Other Stakeholders

From the perspective of a corporate issuer, debt is generally riskier than equity because debt:

Moderate

Corporate Issuers

Investors and Other Stakeholders

Expected regulatory penalties from poor waste disposal are most likely classified as a corporate issuer's:

Moderate

Corporate Issuers

Investors and Other Stakeholders

Stakeholder theory of corporate governance is best described as a framework that:

Moderate

Corporate Issuers

Investors and Other Stakeholders

Shareholders of a highly levered company most likely prefer a risky new project over creditors when the project:

Moderate

Corporate Issuers

Investors and Other Stakeholders

A supplier stakeholder group is most likely concerned with:

Very Difficult

Corporate Issuers

Investors and Other Stakeholders

A levered issuer can choose Project L with a certain payoff of 104 million or Project H with a 40% chance of 180 million and a 60% chance of 20 million. Debt due in one year is 100 million. Shareholders are most likely to prefer:

Moderate

Corporate Issuers

Investors and Other Stakeholders

A utility faces likely future carbon compliance costs absent from current financial statements. The effect is most appropriately considered by a credit analyst as:

Moderate

Corporate Issuers

Organizational Forms and Ownership

Two entrepreneurs want limited liability, transferable ownership interests, and the ability to admit outside equity investors, while avoiding public-exchange listing obligations at launch. The most appropriate organizational form is most likely a:

Easy

Corporate Issuers

Organizational Forms, Corporate Issuer Features, and Ownership

Which organizational form most likely provides owners with limited liability for business debts?

Easy

Corporate Issuers

Organizational Forms, Corporate Issuer Features, and Ownership

In a limited partnership, the partner whose personal assets are most likely at risk for the partnership's unpaid business debts is:

Easy

Corporate Issuers

Organizational Forms, Corporate Issuer Features, and Ownership

The separation of ownership and management in a corporation is best described as shareholders:

Moderate

Corporate Issuers

Organizational Forms, Corporate Issuer Features, and Ownership

Kestrel Robotics, a well-capitalized private company, wants its existing shareholders to be able to sell their shares on a public exchange. It does NOT need to raise new capital and wants to avoid underwriting fees. The approach that best meets these objectives is:

Moderate

Corporate Issuers

Organizational Forms, Corporate Issuer Features, and Ownership

Compared with privately owned issuers, publicly traded corporate issuers are most likely to have securities with greater:

Moderate

Corporate Issuers

Organizational Forms, Corporate Issuer Features, and Ownership

A corporate issuer is liquidated. After secured creditors have been repaid from the pledged collateral, the remaining proceeds are most likely distributed first to:

Moderate

Corporate Issuers

Organizational Forms, Corporate Issuer Features, and Ownership

A private limited company is most likely distinguished from a public limited company by:

Easy

Corporate Issuers

Organizational Forms, Corporate Issuer Features, and Ownership

In a typical limited partnership, which party most likely manages the business and bears unlimited liability for partnership obligations?

Easy

Corporate Issuers

Organizational Forms, Corporate Issuer Features, and Ownership

A company selling shares to public investors for the first time through an initial public offering most likely changes its status from:

Moderate

Corporate Issuers

Organizational Forms, Corporate Issuer Features, and Ownership

A shareholder seeking to influence a corporation's strategic direction is most likely to act by:

Easy

Corporate Issuers

Organizational Forms, Corporate Issuer Features, and Ownership

A leveraged buyout of a listed company most likely results in the company becoming:

Easy

Corporate Issuers

Organizational Forms, Corporate Issuer Features, and Ownership

A corporation with widely dispersed shareholders and professional managers is most likely exposed to:

Moderate

Corporate Issuers

Principal-Agent and Governance

A CEO is rewarded mainly for revenue growth, influences director nominations, and proposes acquisitions below the cost of capital. The governance issue is best described as:

Moderate

Corporate Issuers

Real Options

A mining project has a slightly negative base-case NPV using current commodity prices. The lease terms give the company the right, but NOT the obligation, to double capacity at a low fixed cost if prices rise during the first two years. Management may have ignored:

Moderate

Corporate Issuers

ROIC and Business Models

A company shifts from one-time hardware sales to subscriptions. During the transition, reported revenue growth slows, customer acquisition costs rise, deferred revenue increases, and renewal rates improve. The most accurate interpretation is:

Moderate

Corporate Issuers

Shareholder versus Creditor Incentives

A highly levered company considers a negative expected NPV project with a small chance of a very large payoff. Existing debt is distressed. Shareholders support the project; creditors oppose it. The conflict is best described as:

Moderate

Corporate Issuers

WACC

A company has market debt 300, market equity 700, pretax cost of debt 6%, cost of equity 11%, and tax rate 25%. WACC is closest to:

Easy

Corporate Issuers

Working Capital and Liquidity

Which of the following is most likely a secondary source of liquidity for a corporate issuer?

Moderate

Corporate Issuers

Working Capital and Liquidity

Following a credit downgrade, key suppliers of Danube Foods shorten the company's payment terms from 60 days to 15 days. This change is best described as a:

Moderate

Corporate Issuers

Working Capital and Liquidity

A retailer finances both its seasonal inventory build and its permanent base level of inventory with short-term commercial paper that it rolls over continuously. This working capital financing approach is best described as:

Very Difficult

Corporate Issuers

Working Capital and Liquidity

Anika Berg, an analyst, compiles the following annual data for Solstice Mills: cost of goods sold of 547.5 million, average inventory of 90 million, credit sales of 912.5 million, average receivables of 115 million, purchases of 584 million, and average payables of 64 million. Using a 365-day year, the cash conversion cycle is closest to:

Very Difficult

Corporate Issuers

Working Capital and Liquidity

Tarragon Devices currently has days of inventory on hand of 55, days sales outstanding of 40, and days payables outstanding of 30. Management negotiates supplier terms that raise days payables outstanding to 45 and introduces early-payment discounts that cut days sales outstanding to 32, but slower stock turnover raises days of inventory on hand to 58. The company's new cash conversion cycle is closest to:

Easy

Corporate Issuers

Working Capital and Liquidity

Net working capital is best calculated as:

Easy

Corporate Issuers

Working Capital and Liquidity

The cash conversion cycle is most accurately calculated as:

Moderate

Corporate Issuers

Working Capital and Liquidity

An issuer has days of inventory on hand of 48 days and days sales outstanding of 37 days. The operating cycle is closest to:

Moderate

Corporate Issuers

Working Capital and Liquidity

An issuer reports days of inventory on hand of 52, days sales outstanding of 41, and days payables outstanding of 36. The cash conversion cycle is closest to:

Moderate

Corporate Issuers

Working Capital and Liquidity

A company has cash of 20 million, marketable securities of 15 million, receivables of 65 million, inventory of 90 million, and current liabilities of 95 million. The quick ratio is closest to:

Moderate

Corporate Issuers

Working Capital and Liquidity

A CFO shortens customer payment terms to reduce days sales outstanding. The most likely trade-off is:

Very Difficult

Corporate Issuers

Working Capital and Liquidity

An analyst estimates annual cost of goods sold of 730 million, average inventory of 80 million, annual credit sales of 1,095 million, average receivables of 90 million, annual purchases of 760 million, and average payables of 95 million. Using 365 days, the cash conversion cycle is closest to:

Easy

Corporate Issuers

Working Capital and Liquidity

A committed revolving credit facility is most appropriately viewed as a tool that:

Moderate

Corporate Issuers

Working Capital Policy

A company tightens credit terms. DSO and bad debt decline, but sales decline. The policy's value effect most appropriately depends on: