CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

A firm does not want to increase it financial leverage. It may resort to all of the following actions EXCEPT ______

I. it may disguise a capital lease as an operating lease.
II. it may issue convertible bonds.
III. sell its accounts receivables through a securitization.
IV. it may set up a subsidiary and guarantee its debt.
A. All of them
B. II only
C. I and IV
Explanation: By issuing convertible bonds a firm must immediately recognize a long-term liability, increasing its leverage. Only if and when bonds are converted does debt get reclassified as equity in the distant future.

User Contributed Comments 7

User Comment
llgoms isn't any debt issue considered increasing fin'l leverage? securitizing A/R is off B/S so why isn't it C?
addidas C: it's off-balance-sheet financing and does not increase leverage. A firm cannot convert its assets (A/R) into debt, right?
bj90392 No, it's B becuase the question is ultimately asking what increases leverage. I answered C the first time, too. Damn
kathlee Would A not be unethical as it is distorting the true nature of the lease?
cong Why does sale of bad inventory reduce debt?
jpducros Concerning IV, do you know if we would have to reclassify the OBS guarantee within Debt for analysis purposes ? If so, the IV would increase leverage also.
bsm9 A company cannot legally disguise an operating lease as a capital lease.
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