CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

A declining cash flow from operations to capital expenditures ratio can be interpreted in the following way(s):

I. The firm may eventually have difficulty adding to capacity via capital expenditures without the need to borrow funds.
II. The firm may not be able to pay cash dividends.
III. The firm may have gone through a period of major capital expansion.
A. I and III
B. II and III
C. I, II and III
Explanation: III. It will therefore take time for revenues to be generated that will increase the CFO, bringing the ratio to some normal long-run level.

User Contributed Comments 8

User Comment
mbuechs2 Why not II?
hkcfa2 I guess the question should ask "what could be the reason for this situation?" Obviously II is the result, not the cause.
turtle II would require some additional assumptions to hold. For example - (...) without increase of net debt.
keitsuke II is not correct because dividends paid show up in cashflows to/from financing activities.
soorajiyer Is it right to say the company would not be able to make cash dividends in the "short term"?
Shaan23 II not correct -- think back to financial statement analysis. Dividends paid are CFF...

way to bring it together...
mynotes1 if they are not producing operating cashflows to cover capital expenditure, eventually they wont have cash to pay dividends, right?
epfrndz That's what I thought, if you don't have enough cash for CapEx, eventually dividends could be deferred to sustain reinvestment in the business right?
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