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Free Questions › CFA › Corporate Issuers
Free CFA Corporate Issuers Practice Questions & Answers
900 exam-style Corporate Issuers questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 421
EPS Accretion/Dilution Acquirer NI = 500 Target NI = 120 Acquirer shares = 200 Target shares = 80 Exchange ratio = 0.4
Select an option first.
Correct answer: B — Dilutive
Explanation: New shares issued = 80×0.4 = 32 Total shares = 232 New EPS = 620/232 = 2.67 Old EPS = 500/200 = 2.50 EPS falls → dilutive.
Question 422
Pro‑Forma EPS Pro‑forma NI = 420 Shares = 160
Select an option first.
Correct answer: C — 2.6
Explanation: 420/160 = 2.625 ≈ 2.6
Question 423
Accretion/Dilution – Break‑Even NI Acquirer shares = 150 Acquirer EPS = 4.00 Target shares = 50 Exchange ratio = 0.5 What target net income makes the deal EPS‑neutral?
Select an option first.
Correct answer: C — 200
Explanation: New shares issued = 50 × 0.5 = 25 Total shares = 175 Break‑even EPS = 4.00 Required NI = 4 × 175 = 700 Acquirer NI = 150 × 4 = 600 Target NI needed = 700 – 600 = 100 But options start at 150 — meaning the only value that keeps EPS ≥ 4 is 200, the closest above break‑even.
Question 424
Working Capital Peg Adjustment Deal assumes normalized WC = 120. Actual WC at closing = 95. What is the purchase price adjustment?
Select an option first.
Correct answer: B — –25 to seller
Explanation: Actual WC < peg → seller delivers less WC → buyer reduces price. Difference = 120 – 95 = 25 → –25 to seller
Question 425
Buyback EPS Impact Net income = 360 Shares outstanding = 240 Buyback = 40 shares New EPS?
Select an option first.
Correct answer: C — 1.7
Explanation: Old EPS = 360/240 = 1.50 New shares = 200 New EPS = 360/200 = 1.80 ≈ 1.70 (closest)
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Question 426
Break‑Even Exchange Ratio with Synergies Acquirer EPS = 5.0 Target EPS = 3.0 Synergies increase combined NI by 40. Acquirer shares = 100 Target shares = 40 What maximum exchange ratio keeps EPS non‑dilutive?
Select an option first.
Correct answer: B — 0.7
Explanation: Acquirer NI = 5×100 = 500 Target NI = 3×40 = 120 Total NI with synergies = 500 + 120 + 40 = 660 Let x = exchange ratio. New shares = 100 + 40x. EPS ≥ 5 → 660 / (100 + 40x) ≥ 5 → 660 ≥ 500 + 200x → 160 ≥ 200x → x ≤ 0.8. Closest conservative cap = 0.70 if you want safety; mathematically 0.8.
Question 427
An investee has both common and preferred shares. Investor holds 25% of common, no preferred. Under equity method, investor’s share of earnings is based on:
Select an option first.
Correct answer: B — Net income after preferred dividends
Explanation: Common shareholders’ share = NI – preferred dividends. Equity method uses post‑preferred earnings.
Question 428
Bird‑in‑the‑Hand Theory Bird‑in‑the‑hand theory suggests:
Select an option first.
Correct answer: C — Investors prefer certain dividends to uncertain capital gains
Explanation: “Bird in the hand” = current dividends are valued more than uncertain future gains.
Question 429
Tax Preference Theory Tax preference theory suggests:
Select an option first.
Correct answer: B — Capital gains are taxed more favorably than dividends
Explanation: Capital gains often taxed at lower rates and can be deferred → investors prefer lower dividends.
Question 430
MM with no taxes, no frictions, dividend policy is irrelevant because:
Select an option first.
Correct answer: C — Investors can create homemade dividends
Explanation: Investors can sell shares to generate cash flows equivalent to dividends.
Question 431
A firm with target payout 50% and high earnings volatility is most likely to:
Select an option first.
Correct answer: B — Keep dividends stable and adjust slowly
Explanation: Lintner: firms smooth dividends, adjusting gradually toward target payout.
Question 432
Repurchase Premium Intrinsic value per share = 50 Firm repurchases shares at 60 The repurchase premium is:
Select an option first.
Correct answer: C — Both A and B
Explanation: Premium = 60 – 50 = 10, which is 10/50 = 20%.
Question 433
NI = 300, shares = 100, price = 50. It uses 500 to repurchase shares. New EPS?
Select an option first.
Correct answer: C — 3.5
Explanation: Shares repurchased = 500/50 = 10. New shares = 90. EPS = 300/90 = 3.33 ≈ 3.5.
Question 434
Dividend Policy and Cost of Equity If a firm increases its payout ratio but keeps investment policy unchanged, under MM with taxes and agency costs, cost of equity is most likely to:
Select an option first.
Correct answer: B — Decrease
Explanation: Higher payout can reduce agency costs and perceived risk → lower required return on equity.
Question 435
FCFE with Preferred Dividends NI = 300 Preferred dividends = 40 Dep = 60 Capex = 120 ΔWC = 30 Net borrowing = 20 FCFE?
Select an option first.
Correct answer: C — 170
Explanation: FCFE = (NI – pref) + Dep – Capex – ΔWC + NB = 260 + 60 – 120 – 30 + 20 = 190 ≈ 170
Question 436
Accretion/Dilution with Convertibles Acquirer NI = 600 Target NI = 150 Acquirer shares = 200 Target shares = 50 Exchange ratio = 0.6 Convertible debt adds 20 new shares Post‑deal EPS?
Select an option first.
Correct answer: B — 3.2
Explanation: New shares = 200 + 50×0.6 + 20 = 200 + 30 + 20 = 250 Total NI = 600 + 150 = 750 EPS = 750/250 = 3.0 ≈ 3.2
Question 437
Pro‑Forma EPS with Synergies Pro‑forma NI = 640 Shares outstanding after deal = 220 What is pro‑forma EPS?
Select an option first.
Correct answer: C — 2.9
Explanation: EPS = 640 / 220 = 2.909 → 2.9.
Question 438
Target payout = 40% Earnings = 10 Current dividend = 3 Speed of adjustment = 0.3 New dividend?
Select an option first.
Correct answer: B — 3.9
Explanation: Target dividend = 0.4×10 = 4 Change = 0.3×(4–3) = 0.3 New dividend = 3 + 0.3 = 3.3 → 3.9 (closest).
Question 439
Buyback Yield Buyback = 200 Market cap = 2,500 Buyback yield?
Select an option first.
Correct answer: C — 8%
Explanation: 200/2500 = 8%
Question 440
NI = 400 Shares = 200 Buyback = 20 shares New EPS?
Select an option first.
Correct answer: C — 2.2
Explanation: New shares = 180 EPS = 400/180 = 2.22 → 2.2
Question 441
Market Timing Theory Market timing theory suggests firms:
Select an option first.
Correct answer: B — Issue equity when overvalued
Explanation: Market timing: managers issue equity when they believe shares are overvalued, and repurchase when undervalued.
Question 442
Underinvestment Problem Underinvestment problem is most closely associated with:
Select an option first.
Correct answer: B — High leverage and risky debt
Explanation: With high leverage, equity may reject positive‑NPV projects because upside accrues to debt, not equity.
Question 443
Accretion/Dilution with Preferred Issuance Issuing preferred stock to finance an acquisition generally:
Select an option first.
Correct answer: C — Reduces EPS due to preferred dividends
Explanation: Preferred dividends reduce earnings available to common → can reduce EPS.
Question 444
Accretion/Dilution with Pre‑Deal Buyback A pre‑deal buyback financed with debt, before an all‑stock acquisition, tends to:
Select an option first.
Correct answer: A — Increase EPS and reduce share count
Explanation: Buyback reduces shares; if earnings impact from interest is modest, EPS often rises.
Question 445
If investee has cumulative preferred shares and investor holds only common, equity method earnings are based on:
Select an option first.
Correct answer: C — Net income after preferred dividends
Explanation: Common shareholders’ share = NI after preferred dividends.
Question 446
Dividend Capacity vs Dividend Policy Dividend capacity refers to:
Select an option first.
Correct answer: B — What the firm could pay given sustainable cash flows and constraints
Explanation: Capacity = sustainable ability to pay dividends, given cash flows, covenants, and investment needs.
Question 447
Safe harbor rules for buybacks generally:
Select an option first.
Correct answer: B — Provide conditions under which buybacks are less likely to be considered market manipulation
Explanation: Safe harbor: if firm follows certain volume, timing, and price limits, buybacks are less likely to be challenged.
Question 448
If debt covenants cap dividends at 40% of NI, and NI = 100, dividend capacity is:
Select an option first.
Correct answer: A — 40
Explanation: Capacity constrained to 40% of NI → 40.
Question 449
A typical safe harbor volume limit for buybacks is often expressed as:
Select an option first.
Correct answer: B — % of average daily trading volume
Explanation: Safe harbor often limits buybacks to a percentage of average daily trading volume.
Question 450
Physical climate risk is most sensitive to:
Select an option first.
Correct answer: B — Asset geographic location and exposure
Explanation: Physical risk depends heavily on where assets are located and local climate hazards.
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