CFA Practice Question
A firm needs to purchase 20 warehouses in various states. To finance the purchases, it issues new shares in a seasoned equity offering. It also issues high coupon bonds on which interest must be paid semi-annually. If the firm purchases the warehouses at the beginning of the year, which of the cash flows will be affected in the year-end statements?
Investing;Operating;Financing
A. affected; affected; affected
B. affected; affected; unaffected
C. affected; unaffected; affected
Explanation: The purchase of the warehouses affects the investing cash flows. The bonds and equity offering affect the financing cash flows. These transactions do not affect operating cash flow immediately. The interest payments on the issued debt, however, will affect it. In addition, the dividends paid on the new equity will affect financing cash flows.
User Contributed Comments 11
| User | Comment |
|---|---|
| andzia | for me C is correct... operating cash flow is not affected immediately |
| Rguerra | It does not say immediately. The question states "affected in the year-end statements". You´ll definitely have interest payments during the year. |
| DAS11 | Great question! |
| thekapila | I am not sure how purchasing a property through a issuance of debt can affect investing cash flow..anyone..?? |
| umerch | theapila, becz debt financing is under the head of CFI, issuance of long term debt,2nd company also purchasing property, whcih is long term investment, |
| djread | andzia...assume US GAAP. If the firm purchases the warehouses at the beginning of the year, they issue the bonds at the beggining of the year. Since the bonds are semi-annual pay, coupon interest will affect OCF |
| guirao | what about the capitalizaton of interests? it would not affect CFO. would`nt it? |
| indrayudha | Capitalization of interest is only allowed if the firm build its own warehouse and interest accrued during the buildup. |
| DMCV | The key to this question was the 1 Year period. C would be correct if the period was 1 Quarter. Since the Bond has a semi-annual coupon, the payment is within the year, thus affecting CFO |
| thekobe | yes, interest paid affect the CFO |
| pigletin | for bond, interest payment means coupon payment which is CFO, however interest expense is CFF |