Which of the Following Statements Is Correct

question 79

Multiple Choice

Which of the following statements is correct?

• A) The first pass using the projected statement of financial position method determines the financing feedback effects and determines how much in additional funds are needed.The second pass completes the cycle, identifies the full financing need, and eliminates further feedback effects.
• B) Interest expense on additional new debt is the only statement of comprehensive income account affected by financing feedback, and dividends payable to new ordinary shares is the only statement of financial position account affected.
• C) The projected statement of financial position method is useful for determining additional funds needed, however, it cannot be used in evaluating dividend policy and capital structure decisions.
• D) One reason a firm's managers may choose to meet additional funds needed requirements through ordinary shares is that it involves no financing feedback effects.Since no new debt is used, interest expense will be considered fully in the first pass, the statement of comprehensive income will remain unchanged, and no second pass is needed.
• E) If new debt and new shares are used to meet new financing needs, net income will decrease from the first pass to the second pass even though taxes decrease.In addition, if dividends are to be paid on new shares, this will further decrease the amount of retained earnings available for financing needs.

---

Definitions:

Foreign Exchange Hedge

A financial transaction implemented to protect an investment or business operation from adverse movements in exchange rates.

Foreign Currency Futures

Financial contracts to exchange currencies on a specified future date at a predetermined price.

Forward Exchange Contract

An agreement to exchange currency at a future date at a predetermined rate.

Cash Flow Hedge

A type of financial hedge that protects against exposure to cash flow risk or uncertainty from variable cash inflows or outflows.