CFA corp finance

secondary sources of liquidity

include liquidating short-term or long-lived assets, negotiating debt agreements or filing for bankruptcy and reorganizing the company.

Business risk is the combination of:

operating risk and sales risk.

activist shareholders

pressure companies in which they hold a significant number of shares for changes, often changes they believe will increase shareholder value.

remuneration program Disclosures of a firm's remuneration programs enable an analyst to judge whether its compensation structure aligns management's incentives with the firm's objectives and shareholders' interests.

To judge whether management's incentives are aligned with a firm's stated goals, an analyst should examine the firm's:

contractual infrastructure

An agreement between a company and a labor union that represents most of its employees would be most appropriatelyconsidered part of a company's:

An investment opportunity schedule is a ranking of all the projects available to a company, from highest to lowest IRR. Projects that will add value to a company are the portion of an investment opportunity schedule for which project IRRs are greater than the marginal cost of capital

An investment opportunity schedule is most accurately described as illustrating all the projects:

divided by the market price.

he cost of preferred stock is equal to the preferred stock dividend:

sales - variable costs - fixed costs

how to find EBIT?

weak control systems, poor decision making, legal risk, reputatuonal risk, and default risk

the risk os poor governance include:

DFL = EBIT / (EBIT - interest)

wants the formula for DFL?

operational efficiency, improved control, better operating and financial performance, and lower default risk and cost of debt

what are the benefits of effective governance and stakeholder management?

Reduced risk of default is among the benefits of effective corporate governance. Risks from poor corporate governance include related-party transactions by managers and opportunities for some stakeholder groups to gain advantage at the expense of others.

Benefits of effective corporate governance and stakeholder management most likely include:

primary sources of liquidity

Cash balances, short-term funding, cash flow management of collections and payment

The cash conversion cycle is its operating cycle minus its average days payables outstanding. Therefore, the firm's average days payables must have increased, a clear indication that the firm is relying more heavily on credit from its suppliers. Improved inventory turnover would tend to decrease both the operating and cash conversion cycles. Relaxed credit policies would tend to increase the firm's operating cycle as receivables turnover would tend to decrease.

Compared to the prior year, Chart Industries has reported that its operating cycle has remained relatively stable while its cash conversion cycle has decreased. The most likely explanation for this is that the firm:

stakeholder theory.

The theory that deals with conflicts of interest between a company's owners and its creditors is most appropriately called:

activist shareholder

can alter the composition of a company's shareholder base

act in the interests of the company and its shareholders.

A company director's duty of loyalty is most accurately described as requiring a director to:

Managers and shareholders. Information asymmetry can exist between a company's shareholders and its managers because the company's managers may be much more knowledgeable about the company's functioning and strategic direction. This makes it more difficult for shareholders to monitor the firm's managers and determine whether they are acting in shareholders' interests

For which two of a company's stakeholders does information asymmetry most likely make monitoring more difficult?

greater than the internal rate of return (IRR

If the calculated net present value (NPV) is negative, which of the following must be CORRECT. The discount rate used is:

increases the cost of debt.

Marginal cost of capital schedules slope upward because raising additional capital:

equal to the before-tax cost of preferred stock. because preferred stock dividends are not tax deductible. The cost of preferred shares is usually higher than the cost of debt, but less than the cost of common shares.

The after-tax cost of preferred stock is always:

operating cycle

The average number of days that it takes to turn raw materials into cash proceeds is a firm's:

pull liquidity

The condition that occurs when a company disburses cash too quickly, stretching the company's cash reserves, is bestdescribed as a:

stakeholder theory.

The interests of community groups affected by a company's operations are most likely to be considered in corporate governance under:

resolving the competing interests of those who manage companies and other groups affected by a company's actions.

The stakeholder theory of corporate governance is primarily focused on:

An increase in the corporate tax rate will reduce the after-tax cost of debt, causing the WACC to fall. More specifically, because the after-tax cost of debt = (kd)(1 − t), the term (1 − t) decreases, decreasing the after-tax cost of debt. If the risk-free rate were to increase, the costs of debt and equity would both increase, thus causing the firm's cost of capital to increase.

What happens to a company's weighted average cost of capital (WACC) if the firm's corporate tax rate increases and if the Federal Reserve causes an increase in the risk-free rate, respectively? (Consider the events independently and assume a beta of less than one.)

DOL = (sales - variable costs) / (sales - variable costs - fixed costs)

Whats the formula for DOL?

The trade-off between fixed and variable costs.

Which of the following is a key determinant of operating leverage?

Governments receive greater tax revenues when financial performance is excellent and profits are higher. Creditors do not receive extra returns for performance better than that is adequate to repay debt. Customers seek company stability and ongoing relationships with the company.

Which of the following stakeholders are most likely to benefit from a company's growth and excellent financial performance? A.Customers B. Governors C. creditors

A. Because staggered board elections make it more difficult for activist shareholders to gain control of a board of directors, they are considered an anti-takeover measure. A proxy fight is an attempt to convince shareholders to vote a certain way. A tender offer can be made in the context of a takeover, whether hostile or otherwise

Which of the following statements concerning corporate takeovers is most accurate? A. Staggered board elections are considered an anti-takeover measure. B. A proxy fight refers to a move by management to take away voting rights from an activist shareholder. C.A takeover not supported by management is termed hostile, while a takeover supported by management is termed a tender offer.

both executives and non-executives can serve on the board of directors.

With a one-tier board structure:

pure-play method

a method for estimating a project's or division's beta that attempts to identify publicly traded firms engaged solely in the same business as the project or division

dual class structure

one class of shares may be entitled to several votes per share, while another class of shares is entitled to one vote per share company insiders can maintain significant power over the organization

overlay/porfolio tilt

are used by fund and portfolio managers to manage the ESG characteristics of their overall porfolios ex: reducing environmental or carbon footprint of their portfolio stocks as a whole

marginal cost of capital

cost of the last new dollar of capital a firm raises. As firm raises more and more capital, the costs of difference sources of financing will increase. Raising additional capital increases WACC. Shows WACC for differenc amounts of financing

risk committee

informs the board about appropriate risk policy and risk tolerance of the organization, and oversees the enterprise-wide risk management processes of the organization

capital budgeting process

is the process of identifying and evaluating capital projects, that is, projects where the cash flow to the firm will be received over a period longer than a year

nominations committee

proposes qualified candidates for election to the board, manages the search process, and attempts to align the board's composition with the company's corporate governance policies

compensation committee

recommends to the board the amounts and types of compensation to be paid to direction and senior managers

thematic investing

refers to investing sectors or companies in an attempt to promote specific ESG-realted goals, such as more sustainable practices in agriculture

full integration

refers to the inclusion of ESG factors or ESG scores in traditional fundamental analysis ex: company's cost of capital or future cash flows

corporate governance

refers to the internal controls and procedures of a company that delineate the rights and responsibilities of various groups and how conflicts of interest among the various groups are resolved

engagement/active-ownership investing

refers to using ownership of company shares or other securities as platform to promote improved ESG practices ex: carbon footprint, increased wages, or other social and environmental goals