CFA Practice Question

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CFA Practice Question

Which of the following statements is false?

A. Firms within a given industry often tend to have similar capital structures.
B. Firms in the bio-tech industry tend to use a tremendous amount of debt financing.
C. We might expect to see low-risk industries with high levels of debt. For example, firms in the electric utility industry use a great deal of debt financing.
Correct Answer: B

Firms in the bio-tech industry tend to use a very little debt financing.

User Contributed Comments 7

User Comment
kalps As they have no material assets - mainly euqity finance
rockeR Like Microsoft
setmefree their business is riskier, cuz future earnings are more unpredictable than, say a low growth industry. so if they issue debt, it would be very expensive, due to higher risk. thus they avoid using it, or unable to afford it.
tanyak p.131 - of the Corporate Finance and Portfolio Management Text - "whereas operating costs are similar among companies in the same industry, competitors may decide on different capital structures"

This may make A a false statement? However, notice the "often" in A: A is still a correct statement.
bmeisner A is definitely a correct statement. Companies in the same industries typically have similar stabilities of cash flows so this leads to having similar optimal amounts of debt.
2014 Thanks for page number
johntan1979 MSFT latest qtr D/E ratio = 0.17
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