CFA Level 1 Practice Questions — All Questions

WACC (weighted average cost of capital) represents:

• a.The blended required return on a firm's debt and equity✓
• b.The dividend yield
• c.Only the cost of equity
• d.The risk-free rate

WACC blends the after-tax cost of debt and the cost of equity by their weights.

In capital budgeting, IRR is the discount rate at which:

• a.NPV equals zero✓
• b.Payback is one year
• c.NPV is maximized
• d.WACC equals the risk-free rate

The internal rate of return sets a project's NPV to zero.

All else equal, increasing financial leverage tends to:

• a.Increase both potential returns and risk to equity holders✓
• b.Reduce both risk and return
• c.Have no effect
• d.Guarantee higher profits

Leverage magnifies gains and losses, raising equity risk and potential return.

A sunk cost in project analysis should be:

• a.Counted twice
• b.Used as the discount rate
• c.Ignored because it cannot be recovered✓
• d.Added to the cash flows

Sunk costs are irrelevant to the decision; only incremental cash flows matter.