CF 1.12 Test

Based on good corporate governance practices, it is most appropriate for a company’s compensation committee to:

• A. develop director remuneration policies.
• B. recommend remuneration for the external auditors.
• C. include some external directors.

Based on good corporate governance practices, independent board members most likely:

• A. are pre-approved by management before being nominated.
• B. have a “lead” director when the board chair is not independent.
• C. hold large equity positions but have never worked at the company.

A credit rating agency assesses a company’s corporate governance structure as favorable to creditor rights. The most likely impact of this assessment on the company is a(n):

• A. increase in its risk of default.
• B. reduction in its financial performance.
• C. reduction in its cost of debt.

Q. Consider two companies that operate in the same line of business and have the same degree of operating leverage: the Basic Company and the Grundlegend Company. The Basic Company and the Grundlegend Company have, respectively, no debt and 50 percent debt in their capital structure. Which of the following statements is most accurate? Compared to the Basic Company, the Grundlegend Company has:

• A. a lower sensitivity of net income to changes in unit sales.
• B. the same sensitivity of operating income to changes in unit sales.
• C. the same sensitivity of net income to changes in operating income.

None

• A. a higher degree of total leverage.
• B. a lower sensitivity of operating income to changes in units sold.
• C. the same sensitivity of operating income to changes in net income.

None

• A. is shorter, but its cash conversion cycle is longer.
• B. and cash conversion cycle are both longer.
• C. is longer, but its cash conversion cycle is shorter.

None

• A. 1.60.
• B. 2.67.
• C. 3.20.

Q. The cost of debt can be determined using the yield-to-maturity and bond rating approaches. If the bond rating approach is used, the:

• A. coupon is the yield.
• B. yield is based on the interest coverage ratio.
• C. company is rated and the rating can be used to assess the credit default spread of the company’s debt.

None

• A. 7.62%.
• B. 10.52%.
• C. 12.40%.

Q. The net present value (NPV) of an investment is equal to the sum of the expected cash flows discounted at the:

• A. internal rate of return.
• B. risk-free rate.
• C. opportunity cost of capital.