Chartered Financial Analyst (CFA) Level 1 Practice Exam

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Prepare for the CFA Level 1 Exam with comprehensive study guides. Access multiple choice questions and detailed explanations to enhance your readiness. Start your journey to become a Certified Financial Analyst today!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

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What is the formula for reinvestment?

CFO / cash paid for long-term assets
CFO / net new investments
CFO / total investments
CFO / capital expenditures

The correct answer is: CFO / cash paid for long-term assets

The formula for reinvestment is accurately represented by the choice that indicates the relationship between cash flow from operations (CFO) and cash paid for long-term assets. This formula demonstrates how much of the cash generated from operating activities is utilized to invest in long-term assets, which can include property, plant, equipment, and other capital expenditures necessary for sustaining and growing the business. Reinvestment is crucial for businesses as it reflects their ability to generate cash and allocate that cash effectively towards assets that will generate future returns. By analyzing the ratio of CFO to cash paid for long-term assets, investors and analysts can gauge how well a company is reinvesting its earnings back into the business for growth. The other options do not adequately reflect a clear measure of reinvestment as they either focus on different types of investments or do not specify the essential connection between operational cash flow and capital expenditures necessary for maintaining and enhancing the firm’s productive capacity.