CFA Level 1 · Free topic practice

CFA Level 1 Corporate Issuers: notes and free practice

CFA Level 1 Corporate Issuers links governance, capital investment and financing decisions. Evaluate cash-flow value and incentives together; accounting profit alone does not establish whether a project creates value.

The key ideas, at a glance

Level 1 · Visual study guide Study illustration of an analyzed worksheet, calculator and checked answer.

Identify the competing interests

Read the visual, then follow the worked example below. Use the stated case assumptions.

Illustrative worked case

Look past a growth-only incentive

What does the acquisition improve?

Revenue growth alone
Check whether cash-flow value is destroyed
Returns and risk support value
Assess the incentive against investor value

A larger business is not automatically a more valuable business. These are evaluation paths, not predicted outcomes.

Key methods and mistakes for CFA Level 1 Corporate Issuers
Concept	Rule or decision	Common mistake
Identify the competing interests	Decision maker ≠ person bearing every consequence	Revenue expansion and shareholder value creation are different objectives.
Follow the operating cash cycle	CCC = inventory days + receivable days - payable days	A profitable company can still struggle to make near-term payments.
Value the incremental cash flows	NPV = discounted incremental inflows - investment	A positive accounting profit does not establish positive NPV.
Match financing cost and operating return	WACC = wE × rE + wD × rD × (1 - tax rate)	More debt can add financial risk; it does not guarantee a lower overall financing cost.

01Identify the competing interests
Decision maker ≠ person bearing every consequence
Watch for: Revenue expansion and shareholder value creation are different objectives.
02Follow the operating cash cycle
CCC = inventory days + receivable days - payable days
Watch for: A profitable company can still struggle to make near-term payments.
03Value the incremental cash flows
NPV = discounted incremental inflows - investment
Watch for: A positive accounting profit does not establish positive NPV.
04Match financing cost and operating return
WACC = wE × rE + wD × rD × (1 - tax rate)
Watch for: More debt can add financial risk; it does not guarantee a lower overall financing cost.

Selected 2026 study concepts. Match your preparation to your registered exam-year curriculum. These notes are not complete curriculum coverage.

Free PDF by email

CFA Level I: 20 practice MCQs

Enter your email on the PDF page to receive the printable pack, with answers and explanations. Selected level/pathway questions; see the topic mix before requesting.

Get the free PDF by email Create a free account

No account or payment required for the PDFs. Includes the monthly newsletter; unsubscribe anytime.

Put the method to work

One worked example, from facts to answer

Given
A manager earns a bonus based only on revenue growth.
Method
An acquisition might increase revenue while destroying value.
Answer and interpretation
Evaluate returns and risk alongside growth when assessing the incentive.

Original independent teaching example. Assumptions are stated above; this is not an official exam question or scoring key.

Try 10 free questions

Try it here - no account needed

10 free Corporate Issuers questions

Choose an answer, check the reasoning, then use ‘Review the method’ to revisit the exact idea. Selected practice, not a complete syllabus or pass prediction.

Saved in this tab when storage is available. Responses are not uploaded.

Completed

0 / 10

MCQ correct

0 / 0

Completion is not an exam score.

Question 1 of 10Level I topic sampleCorporate IssuersMultiple choice
A manager is rewarded only for company size and proposes a value-destroying acquisition that raises her pay. This most directly illustrates:
Answer and explanations
The manager’s incentive favors her own reward over the owners’ value objective.
Review the method
- A - correct: The manager’s incentive favors her own reward over the owners’ value objective.
- B: An acquisition does not eliminate business risk, and that is not the stated conflict.
- C: The stem explicitly says the transaction destroys value for the company.
Question 2 of 10Level I topic sampleCorporate IssuersMultiple choice
Which statement best distinguishes common shareholders from lenders in a conventional company?
Answer and explanations
Lenders have specified contractual claims; common shareholders receive the residual after senior claims.
Review the method
- A: Debt contracts and residual equity interests have different claims and risk profiles.
- B - correct: Lenders have specified contractual claims; common shareholders receive the residual after senior claims.
- C: Residual profits normally belong to common equity, not automatically to lenders.
Question 3 of 10Level I topic sampleCorporate IssuersMultiple choice
Inventory days are 50, receivable days 35 and payable days 40. The cash conversion cycle is:
Answer and explanations
50 + 35 - 40 = 45 days from paying for inputs to recovering operating cash under this measure.
Review the method
- A: Adding payable days reverses their role in reducing the cash tied up.
- B: 55 days does not apply the stated three components correctly.
- C - correct: 50 + 35 - 40 = 45 days from paying for inputs to recovering operating cash under this measure.
Question 4 of 10Level I topic sampleCorporate IssuersMultiple choice
A company reduces receivable days from 42 to 32 while inventory and payable days are unchanged. Its cash conversion cycle:
Answer and explanations
Receivable days enter positively, so a ten-day reduction shortens the cycle by ten days.
Review the method
- A - correct: Receivable days enter positively, so a ten-day reduction shortens the cycle by ten days.
- B: Faster collection shortens rather than lengthens the cycle under these assumptions.
- C: Receivable days are a direct component of the cash conversion cycle.
Question 5 of 10Level I topic sampleCorporate IssuersMultiple choice
A profitable company cannot meet a payroll payment due tomorrow because its cash is tied up in inventory. The immediate problem is:
Answer and explanations
Liquidity concerns meeting near-term obligations with available funds, even when reported profit is positive.
Review the method
- A: Current payment difficulty does not by itself establish lifetime profitability.
- B - correct: Liquidity concerns meeting near-term obligations with available funds, even when reported profit is positive.
- C: The facts can arise from a genuine cash-timing mismatch without an accounting error.
Question 6 of 10Level I topic sampleCorporate IssuersMultiple choice
A project costs $100 today and pays $60 at each of the next two year-ends. At a 10% annual required return, NPV is closest to:
Answer and explanations
$60 / 1.10 + $60 / 1.10² - $100 = approximately $4.13.
Review the method
- A: $20 is the undiscounted inflow total minus cost and ignores time value.
- B: The discounted inflows exceed $100, so the sign is positive.
- C - correct: $60 / 1.10 + $60 / 1.10² - $100 = approximately $4.13.
Question 7 of 10Level I topic sampleCorporate IssuersMultiple choice
A project costs $100 today and returns $110 in one year with no other cash flows. Its internal rate of return is:
Answer and explanations
Solve $100 = $110 / (1 + IRR); the rate is 10%.
Review the method
- A - correct: Solve $100 = $110 / (1 + IRR); the rate is 10%.
- B: 9.09% divides the gain by the ending receipt instead of the initial investment.
- C: 110% is the final receipt as a proportion of initial cost, not the return above that cost.
Question 8 of 10Level I topic sampleCorporate IssuersMultiple choice
A company has already paid a nonrefundable $8,000 feasibility fee. It is deciding whether to undertake the project. For incremental NPV, this past fee is:
Answer and explanations
The $8,000 is sunk and does not change between undertaking and rejecting the project.
Review the method
- A: The decision cannot change an already-paid nonrefundable fee, so it is not incremental.
- B - correct: The $8,000 is sunk and does not change between undertaking and rejecting the project.
- C: There is no refund or future receipt under the stated facts.
Question 9 of 10Level I topic sampleCorporate IssuersMultiple choice
Financing weights are 60% equity and 40% debt. Costs are 12% equity and 5% pretax debt; the tax rate is 25% and interest fully deductible. WACC is:
Answer and explanations
0.60 × 12% + 0.40 × 5% × 0.75 = 8.70%, weighting equity cost and after-tax debt cost.
Review the method
- A: 9.20% uses pretax debt cost without the stated tax adjustment.
- B: 12% is the equity cost alone and ignores the financing mix.
- C - correct: 0.60 × 12% + 0.40 × 5% × 0.75 = 8.70%, weighting equity cost and after-tax debt cost.
Question 10 of 10Level I topic sampleCorporate IssuersMultiple choice
A company generates $45 of net operating profit after tax on $300 of invested capital, using the specified capital measure. Its ROIC is:
Answer and explanations
$45 / $300 = 15%; operating profit is compared with invested capital.
Review the method
- A - correct: $45 / $300 = 15%; operating profit is compared with invested capital.
- B: 6.67 is the reciprocal capital-to-profit multiple, not the return.
- C: The profit amount is not a percentage until divided by the capital base.

Four ideas to put to work

Find the method you need

Start with: Present value, the accounting equation and the distinction between owners and lenders.

METHOD 01

Identify the competing interests

Decision maker ≠ person bearing every consequence

Identify managers, owners, creditors and other affected stakeholders.
Ask which incentives could favor the decision maker over the company.
Assess monitoring and accountability rather than assuming a title guarantees independence.

Worked example

Given: A manager earns a bonus based only on revenue growth.
Calculate / decide: An acquisition might increase revenue while destroying value.
Result: Evaluate returns and risk alongside growth when assessing the incentive.

Watch for: Revenue expansion and shareholder value creation are different objectives.

Practise this idea

METHOD 02

Follow the operating cash cycle

CCC = inventory days + receivable days - payable days

Track how long inventory and customer credit tie up cash.
Compare liquidity measures using consistent periods.
Do not confuse delaying suppliers indefinitely with a sustainable cash policy.

Worked example

Given: Inventory days 45, receivable days 30, payable days 35.
Calculate / decide: 45 + 30 - 35.
Result: The cash conversion cycle is 40 days.

Watch for: A profitable company can still struggle to make near-term payments.

Practise this idea

METHOD 03

Value the incremental cash flows

NPV = discounted incremental inflows - investment

Include opportunity costs and incremental future cash flows.
Exclude sunk expenditures that the decision cannot change.
Compare NPV at an appropriate required return, not undiscounted totals.

Worked example

Given: Pay $100 today for $121 in two years; required return is 10% annually.
Calculate / decide: 121 / 1.10² - 100.
Result: NPV is zero; the project earns exactly the stated required return.

Watch for: A positive accounting profit does not establish positive NPV.

Practise this idea

METHOD 04

Match financing cost and operating return

WACC = wE × rE + wD × rD × (1 - tax rate)

Use financing weights appropriate to the valuation framework.
Apply the tax adjustment only when the assumed deduction is available.
ROIC = net operating profit after tax / invested capital.

Worked example

Given: Equity weight 50%, equity cost 10%, debt cost 6%, tax rate 25%; interest is fully deductible.
Calculate / decide: 0.5 × 10% + 0.5 × 6% × 0.75.
Result: WACC is 7.25% under the stated assumptions.

Watch for: More debt can add financial risk; it does not guarantee a lower overall financing cost.

Practise this idea

Questions about this topic

Why is a positive accounting profit not enough to approve a project?: Capital investment analysis evaluates relevant incremental cash flows against the opportunity cost of capital. Accounting profit can differ from cash flow and does not by itself establish positive net present value.
Can IRR and NPV rank projects differently?: Yes, especially when scale or cash-flow timing differs or the cash-flow pattern is unconventional. Understand the assumptions and decision setting rather than selecting a project solely from the larger percentage IRR.
How do governance incentives affect investment decisions?: Managers, owners and other stakeholders can have different incentives. Compensation, oversight and decision rights can influence project selection and financing, so evaluate the incentives alongside the economic cash-flow case.

Sources and curriculum scope

Official outlines establish curriculum scope. The explanations and worked examples are independent teaching material; the sources do not verify or endorse them.

Compare exam-year outlines and topic weights

MiloPrep is an independent study resource, not affiliated with or endorsed by CFA Institute. CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

One worked example, from facts to answer

Given

Method

Answer and interpretation

10 free Corporate Issuers questions

A manager is rewarded only for company size and proposes a value-destroying acquisition that raises her pay. This most directly illustrates:

Which statement best distinguishes common shareholders from lenders in a conventional company?

Inventory days are 50, receivable days 35 and payable days 40. The cash conversion cycle is:

A company reduces receivable days from 42 to 32 while inventory and payable days are unchanged. Its cash conversion cycle:

A profitable company cannot meet a payroll payment due tomorrow because its cash is tied up in inventory. The immediate problem is:

A project costs $100 today and pays $60 at each of the next two year-ends. At a 10% annual required return, NPV is closest to:

A project costs $100 today and returns $110 in one year with no other cash flows. Its internal rate of return is:

A company has already paid a nonrefundable $8,000 feasibility fee. It is deciding whether to undertake the project. For incremental NPV, this past fee is:

Financing weights are 60% equity and 40% debt. Costs are 12% equity and 5% pretax debt; the tax rate is 25% and interest fully deductible. WACC is:

A company generates $45 of net operating profit after tax on $300 of invested capital, using the specified capital measure. Its ROIC is:

Find the method you need

Identify the competing interests

Worked example

Follow the operating cash cycle

Worked example

Value the incremental cash flows

Worked example

Match financing cost and operating return

Worked example

Questions about this topic

Sources and curriculum scope