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Basic Question 1 of 11
Managers may want to manipulate compositions of total cash flow because ______
II. borrowing cost may become lower.
III. the firm may be able to borrow more money from the debt market.
IV. the required rate of the firm's equity may become lower.
V. the required rate of the firm's debt may become lower.
VI. the firm may pay less tax.
VII. managers' stock options may be worth more.
I. share price may increase.
II. borrowing cost may become lower.
III. the firm may be able to borrow more money from the debt market.
IV. the required rate of the firm's equity may become lower.
V. the required rate of the firm's debt may become lower.
VI. the firm may pay less tax.
VII. managers' stock options may be worth more.
User Contributed Comments 8
| User | Comment |
|---|---|
| clin341 | Can someone explain why II and III? |
| Lavay | A company that shows a low D/E ratio might be viewed as low risk and therefore can get a favorable borrowing rate. As it shows a good credit rating, it can borrow more from the capital markets. |
| treakj | it says composition of Cash Flow. Therefore, modifying the composition of OCF, FCF and ICF... The answer is indirectly from the reading. |
| czar | could someone be so kind to explain how does it impact equity. I am able to make sense on just the debt portion |
| thekobe | VI, think about Net Income, if the firm pays less tax is due to a lower Net Income, so that is the only one that is excluded |
| johntan1979 | The correct logic to this question is the manipulation of cash flow statement is meant to make the company's cash flow look good. This has no correlation whatsoever with paying more or less taxes (whether you have good or poor cash flow). |
| Inaganti6 | John Tan to the rescue |
| maryprz14 | CEOs do all sorts of crap |
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Learning Outcome Statements
describe motivations that might cause management to issue financial reports that are not high quality and conditions that are conducive to issuing low-quality, or even fraudulent, financial reports
describe mechanisms that discipline financial reporting quality and the potential limitations of those mechanisms
CFA® 2025 Level I Curriculum, Volume 3, Module 10.