FCA EXAM QUESTIONS AND ANSWERS
Weighted Average Cost of Capital (WACC) for a firm is the: - Answers- rate of return a
firm must earn on its existing assets to maintain the current value of its stock
The three C's of credit are:
a) Character, capital and charity
b) Character, capacity and charity
c) Charity, capital and censor
d) Character, capacity and capital
e) Capital, capacity and conciliate - Answers- d) Character, capacity and capital
Character refers to the borrower's reputation. Capacity refers to the borrower's ability to
repay a loan. Capital refers to the borrower's assets. The lenders want to know if the
borrower's assets could be used to repay credit debts if income is unavailable.
An established credit rating can be damaged if: a) A person has no collateral. b) A
borrower fails to live up to the repayment terms of an agreement. c) A person's income
increases. d) A person's expenses decrease. e) None of the above - Answers- b)A
borrower fails to live up to the repayment terms of an agreement
In order to maintain a good credit rating, it is important to pay your credit card bills on
time
A person or business that is owed money is a _______________. a) Creditor b) Debtor
c) Investor d) Financial institution e) None of the above - Answers- a) creditor
If Bank A has a CAR of 10%, it has enough capital to cushion potential losses and
protect depositors' money as Basel III requires a capital adequacy ratio of at least what
percent? - Answers- 8%
Credit spread risk can be described as the risk that the price of a bond will ______.
A. decline due to an increase in the credit spread
B. decline due to a decrease in the credit spread
C. rise due to a decrease in the credit spread - Answers- A. decline due to an increase
in the credit spread
Narrowing of credit spreads are the upside.Widening of credit spreads are the
downside, where the risk lies in investing. Investors require returns based on risk
(downside), not upside (no return required because it isn't a risk
A single, overall cost of capital is often used to evaluate projects because:
a. It avoids the problem of computing the required rate of return for each
investment
proposal.
b. It is the only way to measure a firm's required return.
,c. It acknowledges that most new investment projects have about the same degree of
risk.
d. It acknowledges that most new investment projects offer about the same expected
return. - Answers- a. It avoids the problem of computing the required rate of return for
each investment proposal
Peter's Audio Shop has a cost of debt of 7%, a cost of equity of 11%, and a cost of
preferred stock of 8%. The firm has 104,000 shares of common stock outstanding at a
market price of $20 a share. There are 40,000 shares of preferred stock outstanding at
a market price of $34 a share. The bond issue has a total face value of $500,000 and
sells at 102% of face value. The tax rate is 34%. What is the weighted average cost of
capital for Peter's Audio Shop?
a. 6.14%
b. 6.54%
c. 8.60%
d. 9.14%
e. 9.45% - Answers- d. 9.14%
If the CAPM is used to estimate the cost of equity capital, the expected excess market
return is equal to the:
a. Return on the stock minus the risk-free rate.
b. Difference between the return on the market and the risk-free rate.
c. Beta times the market risk premium.
d. Beta times the risk-free rate.
e. Market rate of return. - Answers- b. Difference between the return on the market and
the risk-free rate.
Beta measures depend highly on the:
a. direction of the market variance.
b. overall cycle of the market.
c. variance of the market and asset, but not their co-movement.
d. covariance of the security with the market and how they are correlated.
e. All of the above. - Answers- e. All of the above.
A firm with high operating leverage has:
a. low fixed costs in its production process.
b. high variable costs in its production process.
c. high fixed costs in its production process.
d. high price per unit.
e. low price per unit - Answers- c. high fixed costs in its production process.
The weighted average cost of capital for a firm is the:
a. Discount rate which the firm should apply to all of the projects it undertakes.
b. Rate of return a firm must earn on its existing assets to maintain the current value of
its stock.
, c. Coupon rate the firm should expect to pay on its next bond issue.
d. Maximum rate which the firm should require on any projects it undertakes.
e. Required rate which every project's internal rate of return must exceed. - Answers- b.
Rate of return a firm must earn on its existing assets to maintain the current value of its
stock.
If a firm has low fixed costs relative to all other firms in the same industry, a large
change in sales volume (either up or down) would have:
a. a smaller change in EBIT for the firm versus the other firms.
b. no effect in any way on the firms as volume does not effect fixed costs.
c. a decreasing effect on the cyclical nature of the business.
d. a larger change in EBIT for the firm versus the other firms.
e. None of the above. - Answers- a. a smaller change in EBIT for the firm versus the
other firms.
Which one of the following statements is correct concerning the weighted average cost
of capital (WACC)?
a. The WACC may decrease as a firm's debt-equity ratio increases.
b. When computing the WACC, the weight assigned to the preferred stock is based on
the
coupon rate multiplied by the par value of the stock.
c. A firm's WACC will decrease as the corporate tax rate decreases.
d. The weight of the common stock used in the computation of the WACC is based on
the
number of shares outstanding multiplied by the book value per share.
e. The WACC will remain constant unless a firm retires some of its debt. - Answers- a.
The WACC may decrease as a firm's debt-equity ratio increases.
Cameron Industries is expected to pay an annual dividend of $1.30 a share next month.
The market price of the stock is $24.80 and the growth rate is 3 percent. What is the
firm's cost of equity?
a. 7.58 percent
b. 7.91 percent
C. 8.24 percent
d. 8.40 percent
e. 8.76 percent - Answers- C. 8.24 percent
Ellie's Boutique has a bond issue outstanding that matures in fourteen years. The bonds
pay interest semi-annually. Currently, the bonds are quoted at 98 percent of face value
and carry an 8 percent coupon. The firm's tax rate is 35 percent. What is the firm's after
tax cost of debt?
a) 2.88 percent
b) B. 5.36 percent
c) 5.45 percent
d) 8.24 percent
e) 10.72 percent - Answers- b) B. 5.36 percent
Weighted Average Cost of Capital (WACC) for a firm is the: - Answers- rate of return a
firm must earn on its existing assets to maintain the current value of its stock
The three C's of credit are:
a) Character, capital and charity
b) Character, capacity and charity
c) Charity, capital and censor
d) Character, capacity and capital
e) Capital, capacity and conciliate - Answers- d) Character, capacity and capital
Character refers to the borrower's reputation. Capacity refers to the borrower's ability to
repay a loan. Capital refers to the borrower's assets. The lenders want to know if the
borrower's assets could be used to repay credit debts if income is unavailable.
An established credit rating can be damaged if: a) A person has no collateral. b) A
borrower fails to live up to the repayment terms of an agreement. c) A person's income
increases. d) A person's expenses decrease. e) None of the above - Answers- b)A
borrower fails to live up to the repayment terms of an agreement
In order to maintain a good credit rating, it is important to pay your credit card bills on
time
A person or business that is owed money is a _______________. a) Creditor b) Debtor
c) Investor d) Financial institution e) None of the above - Answers- a) creditor
If Bank A has a CAR of 10%, it has enough capital to cushion potential losses and
protect depositors' money as Basel III requires a capital adequacy ratio of at least what
percent? - Answers- 8%
Credit spread risk can be described as the risk that the price of a bond will ______.
A. decline due to an increase in the credit spread
B. decline due to a decrease in the credit spread
C. rise due to a decrease in the credit spread - Answers- A. decline due to an increase
in the credit spread
Narrowing of credit spreads are the upside.Widening of credit spreads are the
downside, where the risk lies in investing. Investors require returns based on risk
(downside), not upside (no return required because it isn't a risk
A single, overall cost of capital is often used to evaluate projects because:
a. It avoids the problem of computing the required rate of return for each
investment
proposal.
b. It is the only way to measure a firm's required return.
,c. It acknowledges that most new investment projects have about the same degree of
risk.
d. It acknowledges that most new investment projects offer about the same expected
return. - Answers- a. It avoids the problem of computing the required rate of return for
each investment proposal
Peter's Audio Shop has a cost of debt of 7%, a cost of equity of 11%, and a cost of
preferred stock of 8%. The firm has 104,000 shares of common stock outstanding at a
market price of $20 a share. There are 40,000 shares of preferred stock outstanding at
a market price of $34 a share. The bond issue has a total face value of $500,000 and
sells at 102% of face value. The tax rate is 34%. What is the weighted average cost of
capital for Peter's Audio Shop?
a. 6.14%
b. 6.54%
c. 8.60%
d. 9.14%
e. 9.45% - Answers- d. 9.14%
If the CAPM is used to estimate the cost of equity capital, the expected excess market
return is equal to the:
a. Return on the stock minus the risk-free rate.
b. Difference between the return on the market and the risk-free rate.
c. Beta times the market risk premium.
d. Beta times the risk-free rate.
e. Market rate of return. - Answers- b. Difference between the return on the market and
the risk-free rate.
Beta measures depend highly on the:
a. direction of the market variance.
b. overall cycle of the market.
c. variance of the market and asset, but not their co-movement.
d. covariance of the security with the market and how they are correlated.
e. All of the above. - Answers- e. All of the above.
A firm with high operating leverage has:
a. low fixed costs in its production process.
b. high variable costs in its production process.
c. high fixed costs in its production process.
d. high price per unit.
e. low price per unit - Answers- c. high fixed costs in its production process.
The weighted average cost of capital for a firm is the:
a. Discount rate which the firm should apply to all of the projects it undertakes.
b. Rate of return a firm must earn on its existing assets to maintain the current value of
its stock.
, c. Coupon rate the firm should expect to pay on its next bond issue.
d. Maximum rate which the firm should require on any projects it undertakes.
e. Required rate which every project's internal rate of return must exceed. - Answers- b.
Rate of return a firm must earn on its existing assets to maintain the current value of its
stock.
If a firm has low fixed costs relative to all other firms in the same industry, a large
change in sales volume (either up or down) would have:
a. a smaller change in EBIT for the firm versus the other firms.
b. no effect in any way on the firms as volume does not effect fixed costs.
c. a decreasing effect on the cyclical nature of the business.
d. a larger change in EBIT for the firm versus the other firms.
e. None of the above. - Answers- a. a smaller change in EBIT for the firm versus the
other firms.
Which one of the following statements is correct concerning the weighted average cost
of capital (WACC)?
a. The WACC may decrease as a firm's debt-equity ratio increases.
b. When computing the WACC, the weight assigned to the preferred stock is based on
the
coupon rate multiplied by the par value of the stock.
c. A firm's WACC will decrease as the corporate tax rate decreases.
d. The weight of the common stock used in the computation of the WACC is based on
the
number of shares outstanding multiplied by the book value per share.
e. The WACC will remain constant unless a firm retires some of its debt. - Answers- a.
The WACC may decrease as a firm's debt-equity ratio increases.
Cameron Industries is expected to pay an annual dividend of $1.30 a share next month.
The market price of the stock is $24.80 and the growth rate is 3 percent. What is the
firm's cost of equity?
a. 7.58 percent
b. 7.91 percent
C. 8.24 percent
d. 8.40 percent
e. 8.76 percent - Answers- C. 8.24 percent
Ellie's Boutique has a bond issue outstanding that matures in fourteen years. The bonds
pay interest semi-annually. Currently, the bonds are quoted at 98 percent of face value
and carry an 8 percent coupon. The firm's tax rate is 35 percent. What is the firm's after
tax cost of debt?
a) 2.88 percent
b) B. 5.36 percent
c) 5.45 percent
d) 8.24 percent
e) 10.72 percent - Answers- b) B. 5.36 percent
