Corporate Finance & Governance Flashcards
7 cards from real CFA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Corporate Finance & Governance flashcards as text
The Pecking Order Theory of capital structure suggests that firms prefer financing in which order?
Answer: Internal funds first, then debt, then external equity
The Pecking Order Theory states firms prefer internal financing (retained earnings), then debt, and finally external equity as a last resort due to information asymmetry costs.
Which of the following best describes the purpose of a poison pill defense?
Answer: To allow existing shareholders to buy additional shares at a discount to dilute a hostile acquirer
A poison pill (shareholder rights plan) allows existing shareholders to buy more shares at a discount, diluting a hostile acquirer's ownership stake and making the takeover more expensive.
Which type of merger combines two firms at different stages of the same production or distribution chain?
Answer: Vertical merger
A vertical merger combines companies at different stages of the supply chain (e.g., a manufacturer acquiring a supplier), while horizontal merges competitors.
A firm's degree of financial leverage (DFL) measures the sensitivity of:
Answer: EPS to changes in EBIT
DFL measures the percentage change in EPS for a given percentage change in EBIT, reflecting the magnifying effect of fixed financial costs (interest).
Under the CFA Institute's Code of Ethics, a research analyst who owns shares in a company they are recommending must:
Answer: Disclose the ownership in the research report
CFA Institute Standards require disclosure of conflicts of interest, including personal holdings in covered companies, so clients can assess potential bias.
Which of the following capital budgeting techniques explicitly accounts for the time value of money?
Answer: Net present value (NPV)
NPV discounts future cash flows to present value using an appropriate discount rate, explicitly incorporating the time value of money, unlike payback or ARR.
A leveraged buyout (LBO) is best characterized as:
Answer: An acquisition using a significant amount of debt, with the target's assets as collateral
In an LBO, the acquirer uses substantial debt financing (often 60-90% of the purchase price), with the target company's assets and cash flows serving as collateral.