Reinforced Concepts - Questions Flashcards
(95 cards)
1
Q
Which security best allows an issuing company to obtain additional funding while keeping debt costs low?
A. Depositary Receipts
B. Preferred Stock
C. Convertibles
D. Warrants
A
D.
Key phrases here include:
**additional funding
**keeping debt costs low
Issuing preferred stock is similar to issuing debt, so it’s not the best answer
Warrants have the ability to bring additional funds into a company while keeping debt costs low
2
Q
What did the Financial Stability Board (FSB) publish proposals for in October 2021?
A
Enhance money market fund resilience
3
Q
Factoring vs. Securitization
A
Securitization is for bundling obligations for investors, rather than a factor
Factored A/R is often sold at a steep discount
4
Q
Financial Statements are used by the board and executive leadership to accomplish which of the following?
A. Assess creditworthiness B. Assess performance against loan covenants C. Reward staff D. Determine whether or not to invest
A
C - Reward staff
5
Q
Lenders, creditors and investors usually pay additional attention to which of the following financial statements?
A.Statement of cash flows B.Balance sheet C.Statement of retained earnings D.Income statement
A
A - Statement of cash flows
6
Q
A subsidiary of a US company based in China keeps its books in the Chinese renminbi and does the majority of its business in the Chinese renminbi (RMB). The home currency is the US dollar (USD). According to IAS 21: The Effects of Changes in FX Rates, during the step where one translates foreign currency financial statements into the functional currency, non-monetary items that are reported at historical cost in RMB ______________.
A.Are translated into USD using the exchange rate on the transaction date B.Do not need to be translated in this step as they are already in the functional currency C.Are translated into USD using the closing exchange rate D.Are translated into USD using the exchange rate as of the date of the fair value measurement
A
B - Do not need to be translated in this step as they are already in the functional currency
7
Q
Which of the following uses of cash would not allow the time value of money to be effective?
A.Investing in equipment that will have 100% idle capacity B.Repaying debts C.Investing in short-term commercial paper D.Selling zero coupon bonds
A
A - Investing in equipment that will have 100% idle capacity
8
Q
A firm’s weighted average cost of capital is 7%, it has achieved a return on total assets of 6% and net income of $400,000. The company also has positive cash flow. Which of the following is the MOST LIKELY result of this scenario?
A.The firm is creating only a small amount of value for investors, so the stock price will likely not be affected by the results either way B.The firm has seen mixed success and the stock price will likely stay the same C.The firm is successful by all measurements given and the stock price will likely rise D.The firm is destroying some of the stock's value and the stock price will likely fall
A
D - Even with net income and positive cash flow, the stock price will decrease
9
Q
What responsibility do treasury professionals typically have in regards to budgets?
A.Treasury professionals use budgets primarily for planning and variance analysis B.Treasury professionals need to assess the impact budgets have on debt covenants but not credit ratings C.Treasury professionals use budgets as an input to their work but are not responsible for the budgeting process D.Budgets may require treasury professionals to change how they handle short-term assets to maintain overall liquidity
A
D - Treasury assess for impacts on debt covenants and credit ratings
10
Q
Which of the following statements is true regarding free cash flow (FCF)?
A.It is not considered a fundamental component of assessing firm value B.It must be a positive number for it to be interpreted positively by investors C.It indicates how much cash generated during the period is available to shareholders and creditors D.It adjusts net income for cash charges, working capital and capital expenditures
A
C - FCF is for shareholders and all creditors
11
Q
Labor is the greatest variable cost for a particular business. Equipment is the greatest fixed cost for the business. Which of the following should the business do if they wish their profits to expand more rapidly, assuming the company is currently profitable? What will happen to the break-even level of output for the business if they make the change?
1. A.Invest in labor to reduce equipment costs; the break-even level will increase
2. B.Invest in equipment to reduce labor costs; the break-even level will decrease
3. C.Invest in labor to reduce equipment costs; the break-even level will decrease
4. D.Invest in equipment to reduce labor costs; the break-even level will increase
A
D - Profits will expand more rapidly using fixed costs once those costs have been covered. As the company is already profitable, investing in more fixed costs will create a higher level of profitability.
12
Q
A firm has increased its return on assets (ROA) from the prior period. The firm’s return on sales increased significantly and its total asset turnover decreased a fair amount over the period. Which of the following is the correct conclusion from these results?
1. A.The firm should look for areas where their investment in assets could be reduced to increase measures such as cash turnover
2. B.All of the ratios mentioned show that both efficiency and effectiveness have increased regarding cost control and asset usage
3. C.The firm should increase control over operating costs by increasing its investment in fixed assets relative to current assets
4. D.The firm should focus on measures such as gross and operating profit margin as a means to increase total asset turnover
A
A
ROA measures net income in relation to the investment in assets. A greater value for this ratio implies a larger net income generated per dollar invested in assets.
The net profit margin, also known as return on sales, shows the percentage of profits earned after all expenses and taxes are deducted from revenues.
Total asset turnover measures how many times the firm’s asset base was used or turned over while generating the period’s revenue. This is a measure of how effectively assets are used to generate revenue. If total asset turnover was too low, then the firm had more investment in assets than a well-managed firm needed to support the experienced revenues.
13
Q
To optimize float, a company who is investing heavily in just-in-time and supply chain management would disburse and collect in which of the following ways?
1. A.Use electronic payments, invoices, and collections
2. B.Disburse via check; collect via electronic invoices and ACH
3. C.Disburse via wire; collect via paper invoices and ACH
4. D.Disburse and collect using checks and paper invoices
A
A - Traditionally, the rule in cash management has been to collect quickly and disburse slowly, within the constraints of prudent business practices and the maintenance of good relations with trading partners and other stakeholders. Suppliers have an incentive to engage in actions that minimize the company’s payment float, while customers try to maximize the company’s collection float. The introduction of electronic payment systems, including commercial cards, has changed the relative incentives to an extent because the efficiency and benefits of the new payment methods (including the reduction in processing costs) outweigh the benefits of delaying paper-based payments, resulting in quicker disbursements.
14
Q
Why is careful management of borrowing and investing during the cash cycle critical to a company’s short-term liquidity and long-term viability?
1. A.Investing generates sufficient inventory cushions and borrowing compensates for accounts receivable delays
2. B.The cycle of purchasing, building, selling and collecting is predictable but has inherent time lag
3. C.While the cash flow cycle is often stable, it cannot grow without continual capital investments
4. D.Cash flow is often uneven for individual accounts and overall working capital
A
D - Many current asset and current liability accounts vary whenever sales activity occurs. These accounts are called spontaneous because no specific working capital management decisions are involved in increasing these accounts. Changes in account levels occur as account activity fluctuates with a change in the level of sales activity. The magnitude of spontaneous changes significantly impacts the amount of external financing necessary for working capital.
15
Q
A company’s credit terms, sales and collection patterns are a determinant of its level of which of the following?
1. A.Permanent versus fluctuating current assets
2. B.Accounts receivable
3. C.Credit risk
4. D.Working capital
A
Answer is B
A firm’s credit terms, sales, and collection patterns determine its level of accounts receivable (A/R). Since A/R must be financed, a firm’s ability to extend credit relates directly to its ability to borrow.
16
Q
When credit scoring is used to analyze the creditworthiness of an applicant, what is the correct chronological sequence for the following steps?
1. Setting of cutoff scores for clear approval or denial of credit
2. Differentiating standard and high-risk accounts based on the applicant’s monthly income, outstanding obligations, and employment history
3. Weighting the characteristics of applicants that fit into each category to establish creditworthiness
________________________________________
1. A.I, II, III
2. B.II, I, III
3. C.II, III, I
4. D.III, II, I
A
Answer is C
17
Q
When assessing the costs of offering trade credit, what is the primary cost to weigh against the cost of bad debt?
1. A.A carrying cost of short-term borrowings
2. B.A discount offer that results in a general increase in sales
3. C.Determining dynamic discounting and benchmark eligibility
4. D.Payment delays resulting from disputed invoices
A
Answer is A
There are costs associated with offering trade credit. On the expense side, the primary costs of A/R are carrying costs. This cost is typically the short-term borrowing cost or the weighted average cost of capital (WACC).
18
Q
A just-in-time (JIT) system can help a company fulfill all of the following goals EXCEPT which?
1. A.Reduce risk of back orders
2. B.Improve inventory planning
3. C.Balance production processes
4. D.Improve supplier quality
A
Answer is A
Keeping minimal inventory levels will not reduce the risk of backorders.
19
Q
A netting system can be used for all of the following transactions EXCEPT which?
1. A.Intercompany transactions
2. B.International external purchase transactions
3. C.Domestic third-party payments or receipts
4. D.Foreign exchange settlements
A
Answer is B
Multilateral netting is used primarily for intercompany transactions between subsidiaries, but some firm’s netting processes also include third-party payments and receipts.
20
Q
Which of the following reflects a win-win approach to improving cash flow?
1. A.Focus on the end of the operating cycle (sale of goods or services through collection of sales receipts)
2. B.Shortening all types of float associated with paper-based collections
3. C.Lengthening all types of float associated with paper-based disbursements
4. D.Focus on the beginning of the operating cycle (purchase of resources through sale of goods or services)
A
Answer is D
In many industries, companies are taking a win-win approach by establishing strategic partner relationships with both suppliers and customers. In these industries, the focus has shifted away from the end of the operating cycle and toward the beginning of the operating cycle (purchase of resources through sale of goods or services). In other words, the focus has shifted to the areas that represent the greatest possible gains in reducing cycle time, such as just-in-time (JIT) inventory and supply chain management.
21
Q
A manufacturing company wants to determine their days’ inventory using data from the past three quarters. Raw materials remained in inventory for 26 days in the first quarter, 35 days in the second and 32 days in the third. The conversion process from raw to finished goods ran 12, 17, and 16 days respectively. The finished goods remained in inventory for 30, 20, and 34 days respectively. Which of the following correctly calculates days’ inventory?
1. A.43 days
2. B.46 days
3. C.74 days
4. D.222 days
A
Answer is C
Take an average of each component
22
Q
To reduce invoice float, what is a critical factor when issuing invoices to your customer who utilizes “auto-match” processes to perform a three-way match prior to authorizing payment of an invoice?
1. A.Summary statements of outstanding invoices
2. B.Clearly stated payment terms and remittance instructions
3. C.Phone call to the customer after sending invoice
4. D.Fast invoice transmission to minimize invoicing float
A
Answer is B
Effective A/R management includes reducing invoicing float, which is the interval between the time goods and services are sold to a customer and the time that a customer receives an invoice. The first step in collecting an account is sending accurate and timely invoices with clearly stated payment terms and remittance instructions.
Delays in invoice preparation or errors on an invoice may extend the payment process. This is particularly an issue with customers that use “auto-match” processes that validate invoices against purchase orders and receiving statements (referred to as a three-way match) to authorize payment of invoices. Minor errors in an invoice can lead to lengthy delays in payment as a result.
23
Q
When working capital decreases, why would net income increase?
A
Interest expense for financing the working capital would decrease
24
Q
For those vendors that use three-way match or “auto-match” processes, what is the best strategy to reduce invoice float?
A
Ensure invoices contain clearly stated payment terms and remittance instructions
25
What is the win-win approach for reducing float?
Instead of focusing on the end of the operating cycle (sale of goods through collection), companies are now shifting focus on the beginning of the process (purchase of resources through sale of goods) as this provides focus on the areas that would contribute to the greatest cycle reduction times
JIT technique and supply chain management are examples of this
26
Sellers offer trade credit (cash) discounts in order to primarily accomplish which goal?
1. A.Remain competitive in the market
2. B.Increase revenue per dollar of sales
3. C.Increase working capital
4. D.Increase financial leverage
Sellers offer trade credit (cash) discounts to encourage their customers to speed up payments or to remain competitive in the market
27
A company has the following accounts receivable (A/R) balance pattern:
* 80% sales from current month
* 55% sales from 1 month prior
* 40% sales from 2 months prior
* 10% sales from 3 months prior
* 0% sales from 4 months prior
Their sales for the first half of the year are as follows:
* January: $17,000
* February: $21,000
* March: $23,000
* April: $22,000
* May: $22,000
* June: $12,000
A treasury professional is asked to estimate incoming cash flow for the month of June. What is the estimated cash collection for June? (Rounded to the nearest whole dollar)
Answer is A.
The A/R Balance pattern shows the BALANCE OF A/R, not the amount collected. Calculate the difference between the balance percentages to determine how much is collected in each month.
28
A company using positive pay wants to improve its speed of response and the accuracy of the positive pay method. Which of the following would allow the treasury professional to make these critical pay/no-pay decisions in the MOST timely manner?
A.Imaging services
B.Photocopies of checks
C.Purchasing cards
D.Full reconciliation
Answer is A
Photocopies are physical copies
29
# Confusing question from Discussion Questions from Chapter 10
Which procure-to-pay step initiates the inventory period and which order-to-cash step ends it?
1. Send and receive PO
2. Ship and receive goods and invoice
3. Send and receive payment
4. Reconcile and account
C - See chart on page 309
30
Which of the following is the LEAST important factor to a company that is selecting a lockbox bank?
A.Balance reporting capabilities
B.Proximity to the company
C.Location of customers making the largest check payments
D.Availability schedule offered
Answer is B
Proximity to the company is not relevant for lockbox decisions.
Balance reporting, remittance data availability, location of customers making the largest check payments, and the availability would all be important considerations
31
The primary objective of a collection study for lockbox selection purposes is to determine the most cost-effective collection system for a company on the basis of what?
A. Banking structure
B. Credit terms
C. Remittance data characteristics
D. Computer capabilities
Answer is C
A collection study uses data from remittance envelopes and images of checks to obtain information, such as the location and geographic concentration of customers and the location of the customers making the largest check payments.
32
A company with high transaction volume for their collections of checks, which they can convert using remote deposit capture, is deciding whether to use an in-house processing center or a lockbox. Which of the following could be a disadvantage if they use a lockbox instead of a company processing center?
A. Harder to scale up or down
B. Greater costs
C. More vulnerable to service interruptions
D. Decreased clarity for external auditors
Answer is B
Lockboxes increase clarity for external auditors because it segregates the controls between depositing cash and the rest of the A/R function
33
Using a letter of credit may result in which of the following?
A. Diversification
B. Collateralization
C. Credit rating substitution
D. Reduced marketability
Answer is C
A letter of credit is a document issued by a bank, guaranteeing the payment of a customer’s draft up to a stated amount for a specified period, provided certain conditions are met. The L/C substitutes a bank’s credit for that of the buyer, substantially reducing the credit risk to the seller.
34
For what reason is an electronic lockbox referred to as a lockbox?
A. It shares many of the reporting features of a traditional lockbox
B. It processes incoming mail payments and converts them to electronic payments
C. It handles both incoming mail and electronic payments such as ACH
D. It provides receivables matching against a company's open invoices
Answer is A
The increased volume of electronic remittance payments spurred the creation of an electronic lockbox. This service combines and presents remittance information from electronic payments. While this service is not literally a lockbox since there is no actual mail involved, it does have many of the reporting features traditionally associated with lockbox processing.
35
The Uniform Customs and Practices for Documentary Credits (2007 Revision), International Chamber of Commerce rule UCP 600 created which of the following rules for letters of credit (L/Cs)?
A. Sets an absolute deadline of five banking days to review L/C documents and pay or decline a draw
B. Requires that the advising/negotiating bank add confirmation to an L/C
C. Makes L/Cs irrevocable, meaning the L/C cannot be canceled or amended without the agreement of all involved parties
D. Allows U.S. banks to issue formal payment guarantees
Answer is A
The current rules are outlined under UCP 600, and these rules affect almost every credit issued under the ICC’s UCP. Most notably, UCP 600 establishes an absolute deadline of five banking days to review documents and determine whether to pay or decline a draw.
36
The Electronic Federal Tax Payment System (EFTPS) is used for collecting which of the following types of tax deposits?
Corporate business
Corporate excise
Employee salary and wage
A. I, II and III
B. III only
C. I and II only
D. I and III only
Answer is A
EFTPS is the primary method for collecting and accounting for federal taxes withheld by employers from individuals' salaries and wages, as well as corporate business, sales and excise taxes.
37
A bank issues a negotiable short-term instrument to finance the import of goods for a company. This instrument requires that the bank take responsibility for paying a draft issued in connection with a letter of credit. What type of trade service is being offered?
A. Documentary collection
B. Letter of credit confirmation
C. Commercial paper
D. Banker's acceptance
Answer is D
A banker's acceptance (BA) can be used to finance the import, export, or domestic shipment of goods, as well as the storage of properly titled goods. BAs are used frequently in conjunction with L/Cs requiring a time draft drawn on a bank.
A BA is created when one company signs an unconditional written order directing a bank to pay a certain sum of money on demand or at a definite time to another company, usually to finance the shipment or temporary storage of goods. **The unconditional written order, also known as a time draft, is stamped as accepted by the bank.**
By accepting the draft, the bank agrees to pay the face value of the obligation if the buyer (i.e., the issuer that drew the draft) fails to make payment. Since the accepting bank assumes the risk of the buyer defaulting, it makes it easier for the buyer or seller to undertake international trade.
38
If the confirming bank in a letter of credit (L/C) confirms the line by committing to the exporter that payment will be made if documents meet the terms and conditions of the L/C, regardless of the issuing bank's ability to pay, what role does the confirming bank also take on?
A. Issuing bank
B. Negotiating bank
C. Advising bank
D. No other role, this is the function of the confirming bank
Answer is B
If requested, the advising/negotiating bank may add confirmation, as the confirming bank, to an L/C. In doing so, the confirming bank commits to the exporter that payment will be made if documents meet the terms and conditions of the L/C, regardless of the issuing bank’s ability to pay. If an L/C is confirmed, the confirming bank will be the negotiating bank as well.
39
Which of the following can a retailer with geographically disparate locations use to reduce availability float for cash and reduce the cost of security?
A. Remote deposit capture (RDC)
B. Smart safe
C. Lockbox
D. Physical pooling
Answer is B
Smart safes provide the ability for a bank to service retail outlets that are not near any of its branches.
40
When compared to an in-house payables operation, a comprehensive payables service has the potential of reducing which of the following?
A. Disbursement control risks
B. The number of cross-border payments
C. Bank service charges
D. Late payments
Answer is A
Outsourcing disbursements is quite common because of the complexities of many payments types and the need for extensive controls over disbursement activities.
41
A banker's acceptance (BA) is created when a bank accepts payment responsibility for which of the following?
A. Repurchase agreement
B. Trade credit
C. Draft
D. Commercial paper (CP)
Answer is C
The unconditional written order, also known as a time draft, is stamped as accepted by the bank.
42
An interest rate exposure horizon for an investment policy is a function of the total interest rate exposure already present and which of the following?
A. The organization's outsourced investment management
B. The expected current equity market return
C. Organization's risk philosophy
D. Organization's capital structure
Answer is C
An investment policy should specify any limitations that a firm may have regarding the maximum and average duration of the investments in its portfolio. This exposure horizon is a function of both the organization’s risk philosophy and the total interest rate exposure already present in other areas of the organization.
43
An organization contracts with an outside investment firm to manage its short-term investment portfolio and provide securities custody services. This type of custody arrangement can be offered at low or no cost, making it attractive. However, what is the primary downside of this arrangement?
A. Typically entails additional reinvestment risk
B. May create an unacceptable fraud risk
C. May restrict the ability to quickly liquidate securities due to the limited number of trading partners
D. Restricts the timing of consolidated reporting
Answer is B
An alternative to fee-based, third-party custodians is to keep securities at the institution (usually a brokerage firm) from which they were purchased. This method affords all the same support as with a custodian bank, but such custody services are normally offered at no charge, which may be attractive to smaller organizations. This approach is considered somewhat more risky because there may be a potential for fraud, as the custodian is supposed to be the third-party control in the process.
44
A treasury manager is comparing two investments. Investment A is a 91-day $100,000 negotiable CD with a holding period yield of 2.4%. Investment B is a 10-year $100,000 debenture with a bond equivalent yield of 9.1%. Assuming Investment B is to be sold after 91 days, calculate the holding period yield for holding Investment B. What is the holding period yield for the investment with the higher holding period yield? (Rounded to the nearest tenth of a percent)
A. 2.3%
B. 2.4%
C. 0.6%
D. 9.2%
Answer is B
The holding period yield for Investment B can be calculated by reordering the bond equivalent yield formula as follows:
Bond Equivalent Yield = Holding Period Yield × (365 ÷ Days to Maturity)
Holding Period Yield = Bond Equivalent Yield × (Days to Maturity ÷ 365)
Holding Period YieldB = 0.091 × (91 ÷ 365) = 2.3%
The holding period yield was given for Investment A, so the two can now be compared:
Holding Period YieldA: 2.4%
Holding Period YieldB: 2.3%
The holding period yield of higher yielding investment is 2.4%.
45
Company A has a $200 Million-dollar revolving line of credit. Due to the size of the line, the facility has been syndicated between four financial institutions. One of the lending institutions has changed its risk scoring for Company A and wishes to exit the syndicate, how does this request work and what is the result of this action on the credit line?
A. The lender must seek the permission of the syndicate and borrower in order to leave the syndicate, the line will be reduced once the lender leaves
B. The borrower can block the the lender from leaving the syndicate until the next renewal period, there is no impact to the line
C. The lender is able to sell their shares without the consent of the borrower, the line is unaffected
D. The lender can leave with 120 day notice, the syndicated line limit will be reduced by that lenders share of the credit line
Answer is C
In a loan syndication, multiple financial institutions share the funding of a single credit facility. The syndicate, or group of lenders, is led by an agent who acts as the intermediary between the firm and the syndicate to negotiate credit terms and documentation, make advances and collect payments on the loan, and disseminate information. The agent usually receives an annual fee for handling these tasks. All syndicate members share common documentation, but each lender has a promissory note, making it a direct lending relationship. ***The individual lenders in the syndicate are usually able to sell their shares with or without consent from the borrower, depending on the terms of the contract.***
46
A corporation is planning to access the debt market next year and currently has a credit rating of Ba1 (Moody's) and BB+ (S&P). Which qualitative factor might the company stress in its upcoming reviews with the credit agencies to hopefully achieve investment grade ratings?
A. The company's internal projections project that its leverage ratio will decrease to 2.0 consistent with investment grade ratings
B. The company plans to enter into labor negotiations with its union this fall as the prior 5-year agreement is expiring at the end of next year
C. A long-standing SEC investigation into the company was recently completed with no action being recommend against the company
D. The new political administration is targeting additional regulations for the company's industry
Answer is C
For issuers, the ratings process includes the quantitative and qualitative analyses of the issuer being assessed. The quantitative aspects focus mainly on financial analyses derived from the issuer’s financial reports. In most cases, credit rating analysts examine the issuer’s financial statements using proprietary models and may perform additional quantitative reviews if necessary. The **qualitative side** is concerned with aspects that are distinct from the financial statements. For a corporate issuer, this may include analyzing the quality of the management and the firm’s competitiveness within its industry, as well as the expected growth of the industry and its vulnerability to business cycles, technology changes, regulatory changes, and labor relations.
47
A corporation's long-term bond credit rating from Moody's changed from to Ba1 to Baa3, what is the most likely impact of this change?
A. Funds are more likely to be raised via equity instead of debt
B. Minimal impact
C. Decrease in borrowing costs
D. Increase in borrowing costs
Answer is C
The distinction between investment and non-investment (speculative or, sometimes, junk) grade ratings is important, especially for issuers either just above or just below the boundary. An issuer whose rating falls from an investment to a non-investment grade can experience an increase in borrowing costs. For example, many short-term investment policies specify that only investment grade instruments can be purchased, which means that a downgraded commercial paper program may be difficult to roll over.
48
Which of the following provides a tangible economic benefit because it is a way to avoid incurring debt or liquidating investments?
A. Zero coupon bonds
B. Trade credit
C. Arbitrage
D. Internal factoring
Answer is B
Trade credit provides a tangible economic benefit as a source of financing because the buyer may avoid liquidating investments or incurring debt over the credit period.
49
A Chinese investor invests in U.S. Treasury bills. If the Chinese renminbi (RMB) appreciates during the holding period against the U.S. dollar (USD), and the investor did not hedge the investment, then which of the following statements would be true?
A. The investment increases in value but default risk remains unchanged
B. The investment declines in value and decreases in default risk
C. The investment increases in value and decreases in default risk
D. The investment declines in value but default risk remains unchanged
Answer is D
FX risk arises when investors purchase securities denominated in foreign currencies. An adverse change in the FX rate can result in a lower rate of return when the proceeds from the investment are converted to the firm's home currency. If the foreign currency depreciates relative to the investor's local currency, then the value of the investment declines. Since the RMB appreciates relative to the USD, the USD depreciates relative to the RMB. Due to a perception of low liquidity and low default risk, US treasuries are generally considered risk-free and serve as the benchmark against which interest rates on other debt securities are compared.
50
How often are ratings usually reviewed by CRAs?
A. Quarterly
B. Annually
C. Monthly
D. As needed
Answer is B
Ratings usually are reviewed by the CRAs once a year based on new financial reports, new business information, or review meetings with management.
51
The all-in rate consists of a base rate. Which of the following can this base rate be?
1. Secured overnight financing rate (SOFR)
2. Prime rate
3. Fed funds rate
4. Eurobond rate
A. I and II only
B. I, II and III only
C. I, III and IV only
D. I, II, III and IV
Answer is B
Eurobond rate is not a base rate.
52
Under the percentage-of-sales method, which pro forma balance sheet item is typically forecasted as a percentage of sales from the pro forma income statement?
A. Net fixed assets
B. Notes payable
C. Inventory
D. Cash and cash equivalents
Answer is C
A common approach used to construct pro forma financial statements is based on the percentage-of-sales method. The percentage-of-sales method involves projecting the income statement items as a percentage of sales. Likewise, certain items on the balance sheet, such as inventory, A/R, and A/P, are also projected as a percentage of sales. These percentages are then used in conjunction with the forecasted sales level to produce a forecasted income statement, balance sheet, and statement of cash flows.
53
What is the most important requirement when completing a cash flow forecast?
A. Disclose assumptions
B. Use the appropriate platform
C. Use appropriate detail
D. Invest the appropriate amount of resources
Answer is C
Perhaps the most important requirement is to make sure positions are forecasted in sufficient detail to meet the firm’s requirements. If the forecast is to be used to determine whether there is sufficient cash to meet obligations in different currencies, positions need to be forecasted in each of those currencies. On the other hand, if the forecast is used to manage the firm’s surplus balances, aggregated forecasts may be sufficient, even if this means that some funds sit idle in bank accounts overnight.
54
Which of the following is one of the five steps a treasury professional should take when building a cash flow forecast?
A. Adjust available balances by the day's anticipated cash inflows and outflows
B. Match current assets to current liabilities
C. Sum available balances in the company's bank accounts
D. Generate a pro forma cash position
Answer is D
Cash flow forecasting requires a treasury professional to take five essential steps:
1. Establish assumptions, including by leveraging historical information, if available
2. Estimate future cash inflows and outflows
3. Generate a pro forma cash position
4. Identify how to finance cash deficits or invest cash surpluses. The shortfall or surplus is measured relative to the predetermined, minimum desired target cash balance
5. Review the forecast against actual results, and revise the forecasting process as necessary
55
Which of the following is an advantage of using regression analysis in a distribution forecast?
A. It improves the accuracy of medium- to long-term forecasts
B. It can accurately predict changes in trend
C. It considers the historical relationship between sales and balance sheet items
D. It does not require large amounts of data
Answer is B
Correlation analysis involves identifying the degree of association between two variables. Understanding the variables that are strongly correlated with cash flow is important as these variables can be used to produce future cash forecasts. For example, there is usually a strong positive correlation between a firm's sales and its cash flows.
Once a correlation or relationship between cash flow and another variable is established, then cash flow can be forecasted using the other variable. This would typically be accomplished with regression analysis. Regression analysis is a statistical method that can be used to assess the impact that a given independent variable or driver variable has on a dependent variable. To estimate the relationship using regression analysis, the user would need historical data values for the dependent and independent variable.
56
What two things should be established at the start of a cash forecasting effort?
A. Purpose and common terminology
B. Clear expectations and common terminology
C. Clear deadlines and common terminology
D. Clear expectations and document processes
Answer is B
Treasury depends on other business units for accurate and timely information, and in turn the business units are often dependent on the reliability of cash forecasts provided by treasury. Clear expectations and common terminology should be established from the start of any forecasting effort. Communication is a two-way process. Treasury will want to educate the business units in how to provide the required data, if data collation cannot be automated. The business units will be incentivized to provide accurate data promptly if treasury understands how the business units want to use the forecasts.
57
A firm conducts business in the United States (USD), Canada (CAD), France (EUR), Germany (EUR), and Australia (AUD). When completing a cash flow forecast, how many forecasts will the firm be required to complete?
A. Four
B. Three
C. One
D. Five
Answer is A
The CTP exam focuses on forecasting on currencies, not necessarily the individual countries.
58
Which of the following is used to determine a company's need for short-term credit or the availability of funds for short-term investing?
A. Medium-term forecasting
B. Short-term forecasting
C. Capital budgeting
D. Long-term forecasting
Answer is A
Cash forecasts from three to twelve months in length are an integral part of cash budgeting and are considered medium-term forecasts. These forecasts project the sources and uses of funds (discussed in Chapter 8, Financial Accounting and Reporting) on a monthly or quarterly basis. Medium-term forecasts are used to determine the firm’s need for short-term credit or the availability of excess cash for short-term investing. They also serve as a benchmark for performance by comparing actual cash flows to projected cash flows based on the cash budget.
59
When the cash flows are relatively stable and known in advance what is the most appropriate platform to use for generating a cash flow forecast?
A. Treasury management system (TMS)
B. Enterprise resourcing planning system (ERP)
C. Spreadsheet
D. Enterprise performance management system (EPM)
Answer is C
The most appropriate platform should be used to develop the forecast. When the cash flows are relatively stable and known in advance, there is very little need for sophisticated specialty tools to analyze the input data.
60
What is the primary goal for developing a cash forecast?
A. To determine the availability of capital
B. To determine opportunities for short-term investment
C. To optimize cash resources
D. To determine credit worthiness
Answer is C
61
A cash manager uses a simple average to calculate the distribution forecast for weekly payments sent to vendors. Which of the following represents the risks involved with this type of forecast?
A. The forecast may not take factors such as holidays and seasonal trends into account
B. The transaction requires large amounts of data and may need to be revised as business conditions change
C. A simple average distribution forecast will always lag any trend in the actual cash flow
D. A simple average distribution forecast will always lead any trend in the actual cash flow
Answer is A
The problem with taking a simple average is that actual payment posting dates may be influenced by more factors than the number of days after issuance.
62
A company recently implemented an enterprise resource planning system, including a treasury management system module. All of the following are true of these systems EXCEPT?
A. They may include a TMS application to directly connect to the organization's banks
B. There may be approval delays for some data outside the TMS such as ledger postings in the general ledger module
C. They eliminate redundant processes and make data exchange seamless
D. They provide a consistent treasury system for the entire company
Answer is B
The greatest advantage of ERP systems is that they can provide a single processing platform for all of an organization’s accounting and finance software, reducing the number of integration points required with stand-alone packages.
63
Which of the following has been adopted by the International Organization for Standardization (ISO) as ISO Standard 9735?
A. ASC X12
B. XML
C. UN/EDIFACT
D. BRL
Answer is C
UN/EDIFACT is a set of internationally agreed-upon standards, directories, and guidelines for electronic exchange of data. UN/EDIFACT has been adopted by the International Organization for Standardization (ISO) as the ISO 9735 standard.
64
What is ISO 20022?
A. A set of internationally agreed-upon standards, directories, and guidelines for electronic exchange of data
B. An XML-based messaging standard for the financial services industry
C. Primarily a messaging system, it is also responsible for helping to develop standards regarding the types of messages that are carried across various telecommunications networks
D. An international standard electronic format used to transmit bank balance, service charge, and other information from a bank to commercial customers or other banks
| (explain what each of the answers relate to)
A - UN/EDIFACT
B - ISO 20022
C - SWIFT
D - Bank Billing Codes
65
What type of advice should be sought at every stage of the project design process?
A. Legal and commercial
B. Tax and legal
C. Tax and technological
D. C-suite and IT
Answer is B
As with all treasury activities, it is important to seek tax and legal advice at every stage of the process.
66
Which TMS solution will most likely require additional specialty software purchases?
A. Treasury module of an ERP
B. Installed system
C. SaaS solution
D. In-house
Answer is A
Treasury modules of ERP solutions can work well if the company already has an ERP system, but ERP solutions may not have all of the required functionality, leading to the need to purchase specialty software to fill any gaps. In addition, because of their organization-wide scope, ERP systems can be difficult and costly to both initially implement and then upgrade.
67
Selecting a good, but perhaps second choice software product from a known and stable provider rather than a superior product from a new and untested provider is doing which of the following in relation to technology risk?
A. Transfer the risk
B. Avoid the risk
C. Mitigate the risk
D. Keep the risk
Answer is B
Avoid the risk. This approach may involve a company deciding not to enter into a certain line of business or utilize a particular business or manufacturing process due to the risks involved. For example, a company may decide to only source from vendors that pass credit checks to try to avoid disruption to its supply chain.
68
What type of risk is a combination of counterparty and operational risk?
A. Technology risk
B. Financial institution risk
C. Event risk
D. Supplier Risk
Answer is B
Supplier risk is the risk related to an organization’s suppliers and outsourcing arrangements and is a specific type of counterparty risk that also entails significant operational risks. The more critical the supplier or commodity is in the production process, the more risk an organization faces if the supplier either fails to deliver according to plan or provides substandard products and services that result in customer dissatisfaction.
69
Which of the following actions would be considered the MOST significant source of internal risk?
A. Data entry errors
B. Defalcation
C. Employment law liability
D. Loss of key personnel
Answer is A
A more significant source of internal risk stems from unintentional actions by employees.
70
A firm has a division whose sole business is managing advanced defense system contracts for the military. Which of the following risks relates specifically to the ability of the organization to properly meet the secrecy requirements of this work?
A. Counterparty risk
B. Physical security risk
C. Sovereign risk
D. Legal and regulatory/compliance risk
Answer is B
Many organizations require physical security for their premises and employees to help prevent physical or electronic access to critical information (e.g., identity theft), as well as to ensure employees’ safety. Security measures also may include biometric systems, using such technologies as fingerprint, face, or iris (eye) recognition to control physical access to facilities or key equipment. **Physical security is especially important for financial institutions, utilities, and defense contractors.**
71
Which of the following asks knowledgeable employees to provide estimates of the highest and lowest values for variables in their purview, sometimes asking them to provide subjective probability distributions with the estimates?
A. Sensitivity analysis
B. Monte Carlo simulation
C. Scenario analysis
D. Value at risk
Answer is C
Subjective probability distributions as well as best and worst case scenarios would be tied to scenario analysis, not Monte Carlo.
72
Which of the following insurance policy deductible structures would be BEST for insuring an unlikely event that, if it occurs at all, has a high probability of occurring multiple times in the same period? (Assume that the policies are otherwise the same except in terms of their pricing relative to the deductible limits.)
A. Insurance with a high deductible set on a per-occurrence basis
B. Insurance with a high deductible set on an aggregate basis
C. Insurance with a low deductible set on an aggregate basis
D. Insurance with a low deductible set on a per-occurrence basis
Answer is B
The event is unlikely, so a high deductible would save the organization significant funds on the cost of the insurance premium. Because the event could occur multiple times in the same period, a deductible set on an aggregate basis would place a limit on the potential liability the organization could face even though the price of this limit is a higher annual premium.
73
What are the two functions of performing periodic testing of disaster recovery and business continuity plans?
A. Prove the plan will work and train staff
B. Identify problems with the plan and increase team collaboration
C. Prove the plan will work and fulfill training requirements
D. Identify problems with the plan and train staff
Answer is D
These tests fulfill two functions: first, they identify problems with the plan that need to be corrected, and second, they help train staff and ingrain appropriate emergency responses.
74
Which of the following is true of dealing with insurance providers and/or insurer ratings?
A. A broker is legally an agent of the insurer and an independent agent is legally an agent of the applicant
B. The risk of insurance provider insolvency and defaults on claim payments is generally considered low when state guaranteed funds exist to insure the insurance providers
C. A.M. Best Company provides ratings on financial strength and on indebtedness of insurance providers which are independent of one another
D. A.M. Best Company provides ratings which warrant an insurance company's financial strength and ability to meet obligations to policyholders
Answer is C
It assigns two types of ratings: one for financial strength and one for indebtedness. Both are independent opinions based on the comprehensive quantitative and qualitative evaluation of an insurance company’s balance sheet strength, operating performance, and business profile.
75
A company wants to estimate the overall risk of opening a new production facility. They have determined probabilities of each risk as well as its relevant monetary impact. Which of the following would summarize the potential impacts of the new plant in a single measure?
A. Sensitivity analysis
B. Value at risk (VaR)
C. Scenario analysis
D. Monte Carlo simulation
Answer B
VaR was designed to incorporate a wide range of risk factors and summarize their impact in a single measure that answers the question, what is the maximum loss that can be expected over a given period of time with a reasonable amount of certainty? That amount is known as the VaR. A VaR is always stated in terms of a probability, an amount, and a time period.
76
Which of the following are appropriate quantitative measures to take when measuring a risk exposure?
I-Explore potential changes to business processes
II-Determine the likelihood of losses due to the exposure
III-Identify the risk drivers
IV-Assess the materiality of the exposure
A. II, III and IV only
B. I and II only
C. I, III and IV only
D. I, II, III and IV
Answer is A
Quantitative assessment is important in order to:
* Assess the materiality, or level, of the exposure (e.g., management will want to identify risk events that will have a larger impact on the organization)
* Determine the probability or likelihood for losses due to the exposure (e.g., a more volatile market environment could increase the chances of economic loss)
* Assess the estimated timing and velocity of the risk (e.g., the treasurer will be able to analyze how quickly a 1% increase in a market interest rate, such as the federal funds rate, will affect the company)
* Identify the risk drivers or factors that cause the risk to materialize
* Provide a benchmark for assessing risk mitigation strategies, generally in a cost-versus-benefit framework
77
A company has an interest rate exposure as a result of an imbalance between its floating interest rate on short-term investment, which is pegged to the 91-day T-bill, and its long-term debt, which is based on fixed rate 30-year Treasury bonds. To hedge the rate on the debt portion, the company could do which of the following?
A. Purchase a call option on the 30-year Treasury bond, with the option expiring in 91 days
B. Enter into an interest rate floor agreement
C. Enter into an interest rate swap to convert the debt's fixed rate to a floating rate
D. Enter into a forward rate agreement on the long-term debt with a floating maturity date
Answer is C
Interest rate swaps are most often used by treasury professionals to synthetically convert a floating-rate loan into a fixed-rate loan (or vice versa) in order to better match the particular needs of a company and hedge against a rise in interest rates.
An interest rate floor agreement cannot be used because its debt is fixed.
78
Which of the following is true of efficient FX and interest rate spot and forward market rates?
A. The forward market rate is a forecast prediction of what the spot market rate should be at that time
B. Large institutional investors can be fast enough to take money from one country, invest in another country's money market, return it to the original country and generate a higher rate of return than could have been made in the original country
C. When the interest rate structure between two countries is the same, this is referred to as interest rate parity
D. When an advantage to investing in another country's money market exists, it will be eliminated quickly because exchange rates adjust to the cross-border money flows created by investors as they attempt to capture the advantage
Answer is D
The relationship among the spot, forward, and interest rates is known as interest rate parity
79
What is the primary mechanism that ensures efficiency in financial markets?
A. Arbitrage
B. Market maker
C. Regulation
D. Speculation
Answer is A
Arbitrage is the process by which an asset is purchased in one market and simultaneously sold in another market to produce a riskless profit. While making a profit is not usually a treasury objective, it is important for a treasury professional to understand the arbitrage process because arbitrage is the primary mechanism that ensures efficiency in financial markets.
80
In a business environment in which derivative instruments have recently caused a number of macroeconomic financial problems, which of the following should an organization do if it is planning on expanding internationally into and using the currency of a country that has a non-readily tradable free-floating currency with at least partial pricing transparency and liquidity?
A. Use derivatives such as a non-deliverable forward (NDF) to hedge currency risks
B. Avoid using derivatives since they would likely increase risk in this situation
C. Manage these exposures using mainstream currency futures contracts
D. Manage these exposures using mainstream currency forward contracts
Answer is A
A currency that is non-readily tradable in the worldwide FX marketplace and is free floating with at least partial pricing transparency and liquidity, fits into two of the underlying risk profile characteristics of an emerging market currency. Although FX exposures in major economies can be addressed using mainstream risk management instruments and techniques, the same is not necessarily the case with emerging markets. Because the currency is not readily tradable, risks cannot be hedged with mainstream currency forward contracts or currency future contracts. It is important to be aware that organizations actually introduce greater elements of financial uncertainty when they fail to take adequate measures to address FX related risk. A non-deliverable forward (NDF) is considered a synthetic instrument in that it is cash-settled in a major base currency (i.e., USD, EUR, etc.). It is used as a proxy hedge in a situation in which an exotic currency is not actively traded in the forward market.
81
A market participant believes that the price of oil will fall and consequently borrows oil commodities from a dealer and sells the commodities. After the price eventually does fall, the participant buys oil commodities on the open market and returns them to the broker who made the original loan. Which of the following describes this situation?
A. A speculator taking a long position
B. A hedger taking a short position
C. A speculator taking a short position
D. A hedger taking a long position
Answer is C
Answer is C
Speculation goes beyond hedging and involves taking a position on the direction of the market in the attempt to make a profit, which is not usually a treasury objective. The long position in a forward contract gains value when the price of the underlying asset rises and loses value when the price of the underlying asset falls. Conversely, the short position gains value when the underlying asset price falls and loses value when it rises. Thus, when expecting the price of an asset to decrease, a speculator takes a short position. That is, the asset was borrowed from a broker or dealer and then sold in the hope that its price will fall, after which it can be purchased at the lower price and returned to the broker or dealer from whom it was borrowed.
82
All of the following are advantages of forward contracts EXCEPT _____________.
A. That they can be created for currency, commodities or financial instruments
B. That they can cover any period of time
C. That they are continually marked-to-market
D. That they can be for any amount
Answer is C
Forward contracts are private contracts (negotiated “over the counter,” or OTC) between two parties and are customized to each party’s needs. OTC means the agreement is reached by speaking and executing with a counterparty, and then the transaction is recorded on both parties’ books as a contractual obligation. The amount of the underlying asset and the maturity date of the contract are established when the contract is negotiated.
In some cases, delivery of the underlying asset takes place at the maturity of the forward contract. There are many different types of forwards, with currency forwards and interest rate forwards being the most common.
Futures trading requires a margin account that is marked to market on a daily basis using the closing price of the previous business day. Marked to market means that the hedger’s gains or losses on the position are reflected on a daily basis.
83
When the yen has a higher interest rate than the U.S. dollar, which of the following is true of the foreign exchange (FX) rate?
A. The yen will sell at a premium in the forward market against the U.S. dollar
B. The yen will sell on par in the forward market against the U.S. dollar
C. The yen will sell at a premium in the spot market against the U.S. dollar
D. The yen will sell at a discount in the forward market against the U.S. dollar
Answer is D
The relationship among the spot, forward, and interest rates is known as interest rate parity. As long as FX and interest rates are efficient, it should not be possible to take a loan in one country with lower interest rates, invest those funds in another country with higher interest rates, return the funds to the original country, and generate a higher rate of return then could have been earned in the original country's market. If an advantage to investing in another country's money market exists, it will be eliminated quickly because spot rates and forward rates adjust to the cross-border money flows created by investors as they attempt to capture the advantage.
In this particular situation, the higher interest rate environment in Japan would cause the Yen to sell at a discount to the U.S. dollar in forward market so that interest rate parity relationship holds.
84
The structure of the specific treasury policy and procedures documents will need to reflect which of the following?
A. Department practice
B. Company culture
C. Managerial discretion
D. Exception management
Answer is A
The structure of the specific treasury policy and procedures documents will need to reflect department practice. Some companies choose to have high-level policy documents, supported by detailed procedures; others have much more detailed policy documents. Company culture will determine the balance of detail between the policy statement and procedures.
85
A board approved investment policy should include which of the following?
1. Maximum weighted average duration for the portfolio
2. Minimum maturity for individual securities
3. Guidelines for investing in foreign securities
4. Sole responsibility for implementing the policy assigned to one individual
5. Prohibition from investing in short-term foreign securities
________________________________________
A. III and V only
B. I, II and III only
C. II, IV and V only
D. I and III only
Answer is D
Minimum maturities for individual securities would not be listed in the policy as it might restrict liquidity
86
When using an external asset manager for managing investments, who is usually responsible by policy of investment execution and reporting?
A. External asset manager
B. Controller
C. External reporting
D. Treasury personnel
Answer is D
For example, the treasurer of an organization would be required to approve the hiring of an investment manager for the organization's short-term portfolio, but the assistant treasurer would be responsible for the day-to-day oversight of the investment manager. Without further understanding of the skill set of the individuals on a treasury team, the best answer is treasury personnel.
87
All of the following are primary reasons why treasury policies and procedures are needed EXCEPT ____________.
A. To provide an effective internal audit and control tool that helps keep a company in compliance with regulatory and legal requirements
B. To provide a control process to mitigate the identified risk in the operation
C. To provide a framework for treasury strategy formulation that encourages educated risk taking and development of innovative treasury solutions
D. To provide a documented guide to best practices to ensure fundamental operational processes are performed in a consistent manner that meets the organization's needs
Answer is C
88
Which of the following is the LEAST important capital market investment objective when the portfolio primarily consists of long-term debt and stock issues?
A. Current income
B. Capital appreciation
C. Capital preservation
D. Intended use of returns
Answer is C
Firms should have a capital market investment policy. The primary differences between the short-term and capital market investment policies will be the overall investment guidelines and the permitted investments. ***These differences result from capital preservation and the retention of liquidity being the primary objectives of the short-term investment portfolio. These objectives, however, may not fit the guidelines for capital market investments, where it is usually assumed that the firm has the ability to weather short-term volatility in the prices of bond and equity securities.***
89
Which of the following statements are true of the earnings multiplier?
1. A company with a high earnings multiplier is expected to generate high future earnings
2. Using actual earnings per share data is only a measurement of past performance
3. The multiplier is a useful benchmark for comparing the earnings capability of companies in different industries
4. The value of the earnings multiplier is a good predictor of common stock valuation
A. I, III, IV
B. III and IV
C. I and II
D. II only
Answer is C
In theory, a company with a higher earnings multiplier would be expected to generate higher future earnings. However, in practice, the earnings multiplier is only as good as the quality of the data used to calculate the EPS. An EPS calculated using actual data is only a measurement of past performance, whereas an EPS calculated using forecast data is only a forecast of future performance, based on certain assumptions. As a result, while the earnings multiplier can provide a useful benchmark, especially against other companies in the same industry, it is not, on its own, a particularly accurate measurement of common stock value.
90
Which factor would promote an increased mix of equity in a capital market investment portfolio?
A. Capital preservation goals and conservative risk tolerance
B. Preference for private rather than public equity
C. Lower short-term liquidity requirements
D. Shorter desired maturity
Answer is C
A careful analysis of the investor’s risk tolerance is a starting point for determining the optimal asset allocation.
The firm’s liquidity needs can also influence the asset allocation decision. The investor will consider the company’s short- and long-term liabilities when determining the liquidity of the portfolio’s assets. For example, a firm that will need cash from the portfolio in the near future will generally hold a higher percentage of short-term investments than a firm with no near-term liquidity needs.
91
What limitation can a firm encounter if it decides that the only important goal for its capital structure is to minimize the weighted average cost of capital (WACC)?
A. Limited financial flexibility
B. A very high debt ratio as well as a significantly low coverage ratio
C. Subject to significant shareholder control
D. High dividend obligations to shareholders
Answer is A
While the obvious goal is to minimize the WACC, this must often be balanced against the need to preserve overall financial flexibility to meet future needs. In the end, the capital structure observed for a given firm at any point in time may be more a function of historical profits, investments, and markets than a conscious decision on management’s part to maintain a specific mix of debt and equity.
92
Which business condition would help an organization to have higher debt levels than a similar organization without this factor?
A. High-resale value liquid assets
B. Variable operating profit stream
C. Generalized business risk
D. Service operation with few physical assets
Answer is A
The ability to use assets as collateral for loans can allow management to choose higher levels of indebtedness, especially if management matches the assets used as collateral with the type of debt (e.g., using a factory building as security for a mortgage and also invoice discounting).
93
Which of the following would be the minimum necessary price that could satisfy an arm's length requirement for a transfer price for a product sold to a subsidiary of the company that is located in a different country?
A. Actual cost of materials, labor and overhead
B. Actual cost of materials and labor but not overhead
C. Actual cost of materials and overhead but not labor
D. Market value
Answer is D
Transfer pricing is the price that subsidiaries of a large corporation charge one another for economic activity between them. To ensure compliance with all taxation regimes along the supply chain, MNCs should ensure transfer pricing for global subsidiaries is done at “arm’s length.” This means setting and documenting transfer prices at the same level at which a firm would buy or sell similar products from an unaffiliated entity, and then applying these prices consistently.
94
Which of the following options would allow a company to have the reduced reporting requirements and restrictions that selling stock over the counter would grant?
A. Listing on NYSE
B. Listing on AMEX
C. Listing on any exchange using American Depository Receipts (ADRs)
D. Listing on NASDAQ
Answer is D
Increasingly, firms are forgoing organized exchanges and listing securities on automated quotation systems, such as NASDAQ or JASDAQ , which started out as computer-based over-the-counter (OTC) trading systems and are now officially recognized exchanges.
95
Which of the following statements encapsulates a key difference between a friendly and a hostile acquisition of a company?
A. How the purchase is communicated to the target firm's stakeholders
B. That the target company's board is not presented with an offer
C. Whether the target company is acquired through a stock transfer or asset purchase
D. How much of the target firm's assets are used as collateral for the purchase
Answer is A
Whether a purchase is considered a merger or an acquisition depends on whether the purchase is friendly or hostile, and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target firm's board of directors, employees, and shareholders.
