D362 Corporate Finance
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Free D362 Corporate Finance Questions
A C corporation may not deduct a net capital loss, but it may carry the net capital loss ____ until it is used up to match against capital gains to reduce the corporation's income tax liability.
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Back three years and forward five years
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Back five years and forward three years
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Forward indefinitely
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Back two years and forward 20 years
Explanation
Explanation:
C corporations cannot deduct net capital losses against ordinary income. However, the tax code allows them to carry back a net capital loss three years to offset past capital gains and carry it forward five years to offset future capital gains. This provision enables corporations to reduce taxable income in profitable years by applying losses from other periods, improving cash flow and tax planning.
Correct Answer:
Back three years and forward five years
Explain the significance of over-the-counter markets in the context of corporate bonds.
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They are less important than organized exchanges.
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They provide a platform for trading corporate bonds that are not listed on exchanges.
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They only facilitate trading for small companies.
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They are primarily used for trading foreign currencies.
Explanation
Explanation:
Over-the-counter (OTC) markets play a critical role in the trading of corporate bonds that are not listed on formal exchanges. These decentralized markets allow brokers and dealers to trade bonds directly with each other through electronic networks. OTC markets provide liquidity, price discovery, and accessibility for a wide range of corporate bonds, including those from smaller or less widely known companies, ensuring that investors can buy and sell bonds even if they are not listed on organized exchanges.
Correct Answer:
They provide a platform for trading corporate bonds that are not listed on exchanges.
What is a direct sale in the context of securities issuance?
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A method where an investment banker sells securities to the public
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A process where the issuing firm sells securities directly to investors
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A type of auction for selling corporate bonds
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A strategy for selling shares at a discount
Explanation
Explanation:
A direct sale occurs when a corporation issues and sells securities directly to investors without the involvement of an investment banker as an intermediary. This approach allows the firm to raise capital while avoiding underwriting fees and relying on its own marketing and distribution capabilities. It is commonly used for smaller offerings or when the issuer has established relationships with potential investors.
Correct Answer:
A process where the issuing firm sells securities directly to investors
A company has an AR turnover ratio of 8. If the total credit sales for the year are $400,000, what is the average accounts receivable balance for the company?
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$50,000
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$100,000
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$200,000
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$300,000
Explanation
Explanation:
The accounts receivable (AR) turnover ratio is calculated as: AR Turnover = Credit Sales ÷ Average Accounts Receivable. Rearranging the formula to solve for Average Accounts Receivable gives: Average AR = Credit Sales ÷ AR Turnover. Here, Average AR = $400,000 ÷ 8 = $50,000. This represents the average amount of receivables outstanding over the period.
Correct Answer:
$50,000
What are securities in the context of corporate finance?
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Physical assets owned by a company
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Financial assets sold by companies to raise capital
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Liabilities that companies must pay off
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Real estate investments held by corporations
Explanation
Explanation:
Securities are financial instruments, such as stocks and bonds, that companies issue to raise capital from investors. They represent ownership or creditor relationships with the issuing company, providing a mechanism for firms to obtain funding while offering investors potential returns through dividends, interest, or capital gains. Securities are essential tools for capital formation and investment in corporate finance.
Correct Answer:
Financial assets sold by companies to raise capital
What is a key characteristic of preferred stock in relation to common stock?
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It has lower returns than common stock
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It has higher priority than common stock
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It is not tradable on the stock market
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It represents ownership in a private company
Explanation
Explanation:
Preferred stock is a class of equity that has a higher claim on a company’s assets and earnings than common stock. Preferred shareholders receive dividends before common shareholders and have priority in the event of liquidation. While they typically have fixed dividend payments, they usually do not have voting rights. This priority and predictable income make preferred stock less risky than common stock, though potential returns may be lower.
Correct Answer:
It has higher priority than common stock
Explain the significance of maturity premiums in the context of the Liquidity Preference Theory.
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They indicate that investors are willing to accept lower returns for longer-term investments.
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They reflect the additional return investors expect for taking on the risk of longer holding periods.
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They show that investors prefer to invest only in short-term securities.
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They suggest that all investors have the same preference for liquidity regardless of maturity.
Explanation
Explanation:
Maturity premiums arise from the Liquidity Preference Theory, which states that investors prefer short-term securities due to their higher liquidity and lower risk. To encourage investment in longer-term securities, issuers must offer a higher return, known as the maturity premium. This premium compensates investors for the increased risk and reduced flexibility associated with holding securities over longer periods, ensuring they are adequately incentivized to commit capital.
Correct Answer:
They reflect the additional return investors expect for taking on the risk of longer holding periods.
Leverage refers to how companies finance their operations with:
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Issued stock
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Treasury stock
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Inventory
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Debt
Explanation
Explanation:
Leverage in corporate finance refers to the use of debt to finance a company’s operations or investments. By borrowing funds, a company can increase its potential returns on equity, as debt can amplify profits when investments perform well. However, higher leverage also increases financial risk, as the company must meet fixed interest obligations regardless of business performance.
Correct Answer:
Debt
Operating activities refers to:
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Buying assets such as machinery.
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Borrowing money from creditors.
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Generating revenues (and profits) via sales.
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Paying creditors back.
Explanation
Explanation:
Operating activities encompass the core business activities that generate revenue and profits, such as selling products or providing services. These activities are reflected in the cash flow from operations section of the cash flow statement and are critical for assessing a company’s ability to sustain and grow its operations. Activities like buying assets or borrowing are considered investing and financing activities, respectively.
Correct Answer:
Generating revenues (and profits) via sales.
Corporations are allowed to exclude from taxable income up to 50% of dividend income received from the stock they own in other companies. This exclusion is referred to as the
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Corporate Exempt Dividend rule
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Corporate Dividend Tax Credit
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Double Taxation Exclusion
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Corporate Dividend Exclusion
Explanation
Explanation:
The Corporate Dividend Exclusion allows corporations to exclude a portion of dividend income received from investments in other companies from their taxable income. This provision is intended to prevent double taxation of corporate earnings, where income is taxed at both the distributing corporation level and the receiving corporation level. By excluding up to 50% of dividends, companies are encouraged to invest in other corporations while reducing their overall tax liability.
Correct Answer:
Corporate Dividend Exclusion
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