once again, shorter/quicker questions. Get Set, Go! (I like that screen name fyi) Im starting with a nasty one that i dont like. I dont know how many times i had to read this before i understood the question (Actually i dont think i still understand it, but i would never say that on the forum) Suppose that it is incorrect to assume (as an analyst did) that the deferred tax liability will reverse in the near future. What will be the likely effects on their estimate of the company’s current leverage and her forecasts of future operating cash flow, assuming the analyst is incorrect in their conclusion but makes the adjustment and forecast that are consistent with their assumption? a- underestimate both b- one is overestimated, the other is underestimated c- overestimate both
when an assumption that DTL will reverse is made - a cash outflow is imminent. Based on that - future operating cash flow would be underestimated. Once the DTL is estimated to be reversed - future liabilities will be lower - so Leverage in future will be lower as well. Is the answer A - Underestimate both? PLS PLS PLS TELL ME I AM FINE!!!
B? if it doesn’t reverse it will become equity and have impact on leverage
B?
A
The balance sheet sheet adjustment for a deferred tax liab. that is expected to reverse is to reduce the liab to the PV of the expected cash flows and increase equity by the same amount. That is the adjustment the analyst must have made. The correct adjustment for a def. tax liab. that is not expected to reverse is to convert the entire liability to equity. By not converting the entire liab to equity, the analyst will OVERestimate current leverage because the adjusted balance sheet will have too much debt and too little equity. Furthermore, a deferred tax liab. that isnt expected to reverse will have no future cash flow effects. The reversal of a deferred tax liab, however, increases incometax expense and taxes payable and reduces operating cash flow. By assuming that it will reverse, the analyst has incorrectly assumed operating cash flow will be reduced in the future, and she therefore UNDERestimated future operating cash flow. (whew, i am never posting another question with an answer this long that i cannot cut and paste) answer is B…(nasty!) Which justification for repurchasing stock is the least valid? A) Repurchases offer shareholders more choices than cash dividends. B) A cash dividend increase, in response to short-term excess cash flows, may confuse investors. C) Shareholders prefer capital gains to cash dividends.
C- Seems like another poorly worded question. It all depends what tax bracket that shareholder fall .
C? bird in hand theory
swaptiongamma Wrote: ------------------------------------------------------- > C? bird in hand theory bird theory says take dividends and dont wait for cap gains, correct?
C) Shareholders prefer capital gains to cash dividends.
yeps - and hence least valid - since option C says otherwise
answer was C Which of the following events would decrease financial leverage? A) Paying dividends. B) Issuing debt to purchase assets. C) Issuing common stock to purchase assets.
B
C) Issuing common stock to purchase assets.?
Is Financial Leverage = D/E or D/TA??? I am confused
Financial Leverage is D/E. When TA increases, D is lower - then E is higher. So issuing Common Stock to purchase assets would increase TA, – hence increase E. D remains the same so D/E drops. Choice C
I read increases
hi cp, My thinking was as below. - Was I plain lucky in choosing C? CS up -> E up D = same FL = D/E = Down
i was confused on this one as well. doesnt DuPont model say financial leverage is assets/equity???
SkipE99 Wrote: ------------------------------------------------------- > doesnt DuPont model say financial leverage is > assets/equity??? Skip - That is exactly where I had double mind’s on.