CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

You are analyzing a consumer products firm. The management of the firm is considered to be fairly conservative. Which of the following would you likely observe?
A. The firm will have little or no unshielded taxable income.
B. The firm's target debt ratio is greater than the optimal debt ratio.
C. The firm's optimal debt ratio is greater than the target debt ratio.
Explanation: If the management is fairly conservative, then they will likely have not shielded much of their taxable income and not used much of their financial flexibility. The optimal debt to equity ratio is likely to be greater than the management set target debt to equity ratio.

User Contributed Comments 5

User Comment
murli Because, target debt ratio would be conservatively low!
mtcfa I understand the answer, but part of it assumes A.
yly13 A's wrong because the firm may very well have significant taxable income even with a conservative strategy. Only that an optimal strategy would suggest more.
HenryQ What does it mean by "not shielded much of their taxable income"...?
business TAx shield - taking more deductions to taxable income.....(for companies ..taking more debt inorder to reduce taxable income by interest deductions). Hence a conservative company has more unshielded income...
You need to log in first to add your comment.