A candidate sees a capital budgeting question on their Level I exam. Project A has a higher NPV than Project B. They confidently select Project A and move on, feeling like they just banked an easy point. They failed the question. The projects had unequal lives, a detail they skimmed over, which required a completely different analysis method. This single oversight is a classic, devastating point-killer in Corporate Issuers.
This page provides 10 free, exam-caliber CFA Level I Corporate Issuers practice questions for the 2026 exam. Each question includes a detailed explanation breaking down the correct answer, the logic behind tempting wrong answers, and the underlying concepts from capital budgeting, leverage, and governance you must master to pass.
Key facts
- Official Body
- CFA Institute
- Topic Weight (Level I)
- 6-9% of the exam, approximately 11-16 questions
- Key Concepts
- Capital budgeting (NPV, IRR, EAA), cost of capital (WACC), leverage (DOL, DFL, DTL), corporate governance, ESG
- Exam Format
- 180 multiple-choice questions with three unique answer choices
- Core Decision Rule
- For mutually exclusive projects with equal lives, always select the project with the highest positive NPV.
- Required Study Hours
- 300+ hours for the entire Level I curriculum
What Are the Most Common Corporate Issuers Traps?
The most common traps in Corporate Issuers involve misapplying capital budgeting rules under specific conditions, like for projects with unequal lives or conflicts between NPV and IRR. Candidates frequently make predictable errors in WACC calculations and confuse decision rules for independent versus mutually exclusive projects.Here are the errors that cost the most points:
- The single biggest trap is choosing a project based on the higher NPV when the projects are mutually exclusive and have unequal lives.
- Candidates frequently misapply decision rules, using the IRR rule when it conflicts with the superior NPV rule for mutually exclusive projects.
- Forgetting to use the after-tax cost of debt in the WACC calculation is an extremely common and predictable error.
- Corporate governance and ESG are no longer "soft" topics; expect specific questions on stakeholder management, board structures, and ESG implementation methods.
- You must be able to calculate and interpret all three forms of leverage: operating (DOL), financial (DFL), and total (DTL).
- A score below 60% on these practice questions indicates foundational gaps that require returning to the curriculum before attempting more problems.
About This Corporate Issuers Diagnostic Quiz
These 10 questions are not a random sample. They are a diagnostic tool, specifically designed by CFA charterholders to find the hidden traps and subtle misunderstandings that cause candidates to fail. We focus on the exact scenarios where the formulas are easy but the judgment is hard.
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As you work through them, don't just solve for the right answer. Force yourself to articulate why the other two choices are wrong. This is the skill that separates passing candidates from the rest. For a full-scale adaptive question bank that targets your personal weak areas, you can try VoraPrep's complete CFA Level I course.
Corporate Issuers Practice Questions
Work through these questions under timed conditions if possible. Aim for approximately 90 seconds per question. The real learning happens in the explanations that follow.
Question 1: Capital Budgeting Decision Rules
An analyst is evaluating two mutually exclusive projects with conventional cash flows. Project Alpha has a higher Net Present Value (NPV) than Project Beta. Project Beta has a higher Internal Rate of Return (IRR) than Project Alpha. Both projects' NPVs are positive, and both projects' IRRs are greater than the company's cost of capital. Which project should the analyst recommend?
The NPV method assumes cash flows are reinvested at the company's cost of capital, which is a more realistic assumption than the IRR's implicit assumption of reinvestment at the project's own IRR. NPV measures the total increase in shareholder wealth in dollar terms, making it the superior metric for capital allocation decisions.
Question 2: Cost of Capital Calculation
A company has the following capital structure:
- Debt: $40 million market value, with a pre-tax cost of debt of 6%
- Equity: $60 million market value, with a cost of equity of 11%
- The company's marginal tax rate is 25%.
What is the company's Weighted Average Cost of Capital (WACC)?
Step 1: Calculate the capital component weights.
- Total capital = Market Value of Debt + Market Value of Equity = $40M + $60M = $100M
- Weight of Debt (wd) = $40M ÷ $100M = 0.40
- Weight of Equity (we) = $60M ÷ $100M = 0.60
Step 2: Calculate the after-tax cost of debt.
- After-tax cost of debt = Pre-tax cost of debt × (1 − Tax rate)
- After-tax cost of debt = 6.0% × (1 − 0.25) = 4.5%
Step 3: Apply the WACC formula.
- WACC = (wd × After-tax cost of debt) + (we × Cost of equity)
- WACC = (0.40 × 4.5%) + (0.60 × 11.0%)
- WACC = 1.8% + 6.6% = 8.40%
Answer A is the most common mistake: using the pre-tax cost of debt (0.40 × 6.0% + 0.60 × 11.0% = 9.00%). The exam will always include a distractor based on this error. Answer C results from incorrectly tax-affecting the equity component, which is wrong.
Question 3: Corporate Governance
Which of the following is most likely a feature of a principles-based approach to corporate governance?
- Principles-based governance (common in the U.K. and Europe) sets forth objectives and best practices, allowing companies flexibility. The phrase "comply or explain" is key. A recommendation for board independence (Answer C) is a principle, not a hard rule.
- Rules-based governance (common in the U.S.) establishes specific, legally binding mandates. Mandatory role separation (A) and attendance requirements (B) are examples of inflexible rules.
Effective governance also involves the structure and function of board committees (audit, compensation, nominations) and managing relationships with all stakeholders, not just shareholders.
Question 4: Leverage
A company's sales increase by 10%, leading to a 25% increase in earnings before interest and taxes (EBIT). Its EBIT is $200,000 and its interest expense is $40,000. What are the company's degrees of operating leverage (DOL) and financial leverage (DFL)?
- Degree of Operating Leverage (DOL) = % Change in EBIT ÷ % Change in Sales
- Degree of Financial Leverage (DFL) = % Change in EPS ÷ % Change in EBIT. A more common formula for calculation is DFL = EBIT ÷ (EBIT − Interest).
- DOL: The question gives you the inputs directly. DOL = 25% ÷ 10% = 2.5. This means for every 1% change in sales, EBIT will change by 2.5%.
- DFL: Using the calculation formula: DFL = $200,000 ÷ ($200,000 − $40,000) = $200,000 ÷ $160,000 = 1.25. This means for every 1% change in EBIT, net income (and EPS) will change by 1.25%.
- The Degree of Total Leverage (DTL) would be DOL × DFL = 2.5 × 1.25 = 3.125.
Answer B incorrectly calculates DFL. Answer C incorrectly calculates DOL. You must have these formulas memorized.
Question 5: ESG Integration
An investment manager who excludes all tobacco and firearms companies from their portfolios, regardless of their financial performance, is best described as using:
- Negative Screening: The practice of explicitly excluding certain sectors or companies based on specific ESG criteria. This perfectly describes the manager's actions.
- ESG Integration: The systematic inclusion of material ESG factors into fundamental financial analysis. An integrated approach might still invest in an oil company if it has superior ESG risk management compared to its peers.
- Best-in-class (or Positive Screening): An approach that seeks to identify and invest in companies that are leaders in their respective industries based on ESG performance.
Other methods you should know include thematic investing (focusing on ESG-related trends like clean energy) and impact investing (investing to generate a specific beneficial social or environmental impact alongside a financial return).
Question 6: Project Sequencing
An analyst is evaluating two independent projects, X and Y. Both have positive NPVs. What is the correct investment decision?
Question 7: Cost of Equity (CAPM)
An analyst gathers the following data:
- Risk-free rate: 2.5%
- Expected market return: 9.0%
- Stock's beta: 1.4
Using the Capital Asset Pricing Model (CAPM), the company's cost of equity is closest to:
Answer C is a classic error: multiplying beta by the full market return instead of the market risk premium (2.5% + 1.4 × 9.0% = 15.1%). Answer B is a simple arithmetic mistake.
Question 8: Dividend Policy
According to the dividend irrelevance theory proposed by Miller and Modigliani, in a world with no taxes or transaction costs, a company's dividend policy has no effect on its:
The theory assumes investment policy is decided separately. If the firm pays a dividend but needs capital for a positive-NPV project, it will simply raise that capital externally. While the stock price will drop by the dividend amount on the ex-dividend date, the shareholder's total wealth (stock value + cash dividend) remains the same. Dividends clearly affect the cash balance (C) and can affect EPS (B) depending on the alternative (like a share repurchase).
Question 9: Corporate Structure
A conflict of interest between a company's shareholders and its creditors is most likely to arise over a decision to:
Investing in a very high-risk project (Answer B) creates this conflict. If the project succeeds, shareholders get all the upside. If it fails and the company goes bankrupt, creditors bear the downside. This is known as asset substitution risk. Issuing equity (A) and repaying debt (C) both de-risk the company, which is favorable to creditors.
Question 10: Projects with Unequal Lives
A company is evaluating two mutually exclusive projects. The company's cost of capital is 10%.
- Project Saw has a 3-year life and an NPV of $15,000.
- Project Hammer has a 6-year life and an NPV of $22,000.
Which project should the company choose?
Step 1: Calculate the EAA for Project Saw.
- This is a time value of money problem. You have the Present Value (PV = $15,000), the interest rate (I/Y = 10%), and the number of periods (N = 3). You need to solve for the Payment (PMT).
- Using a financial calculator: PV = 15,000; I/Y = 10; N = 3; CPT → PMT.
- The EAA for Project Saw is $6,031.
Step 2: Calculate the EAA for Project Hammer.
- PV = $22,000; I/Y = 10; N = 6; CPT → PMT.
- The EAA for Project Hammer is $5,051.
Step 3: Compare the EAAs.
- Since Project Saw's EAA ($6,031) is higher than Project Hammer's EAA ($5,051), Project Saw adds more value on an annualized basis and should be chosen.
Answer B is the trap. Selecting the higher NPV is only correct for projects with equal lives.
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How Did You Score?
Be honest with your self-assessment. This isn't about getting a perfect score; it's about diagnosing your weaknesses before exam day.
- If you scored 0-4 out of 10: You have significant foundational gaps. You are likely missing core definitions and formulas. Your next step is not to do more questions. Go back to the curriculum readings for Corporate Issuers. A structured resource like VoraPrep's lessons and adaptive practice can help rebuild this foundation. Do not proceed until you can define these concepts from memory.
- If you scored 5-7 out of 10: You understand the basics but struggle with application, especially under pressure. You likely fell for one or two of the "tempting" wrong answers. Your next step is to focus on why you miss questions. For every error, write down the specific reason: "I forgot to use EAA for unequal lives," or "I confused independent and mutually exclusive projects." This active error analysis is the fastest way to improve.
- If you scored 8-10 out of 10: Excellent work. You have a strong command of the material. Your task now is to hunt for your remaining, hidden weaknesses and achieve complete consistency. This is where a large, adaptive question bank like VoraPrep's becomes invaluable. You need to see hundreds of variations to ensure nothing can surprise you.
How Does VoraPrep Compare to Traditional CFA Courses?
VoraPrep provides a complete, 6-pillar interactive course that contrasts sharply with the passive video lectures and high costs of traditional CFA prep. A 10-question quiz is a great diagnostic, but it's not a substitute for a comprehensive study program designed to get you past the finish line.
| Feature | VoraPrep | Legacy Providers (e.g., Kaplan Schweser) |
|---|---|---|
| Learning Model | Complete 6-pillar interactive course | Passive video lectures and print books |
| Practice Bank | 2,500+ questions with adaptive learning | Static question bank |
| Personal Tutor | Vory, your 24/7 personal tutor | Limited email or forum support |
| Study Plan | Personalized daily plan & readiness score | Generic, fixed study calendar |
| Exam Simulation | 1:1 test-center mock exams | Included in premium packages |
| 2026 Pricing | $29/month or $249/year | $1,500 - $3,500+ |
Our adaptive learning engine identifies the specific subtopics where you're struggling (like project sequencing or WACC calculations) and serves you more questions on those areas until you achieve mastery. Every question comes with a detailed rationale, and if you're ever stuck, you can ask Vory, your 24/7 personal tutor, for a step-by-step explanation. For an objective look at the options, see our guide on the best CFA Level I courses available today.