Corp fin

M

manya

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
Can somebody please answer this with explaination. this is from schweser
Which of the following will mostlikely lead to an increase in typical firms capital investment in current period
a) A need to increase inventory
b) An increase in firms expected marginal tax rate
c) A decrease in market value of firms debt
Thanks a ton
 
An increase in inventory, since inventory is a capital investment.
A capital investment is any asset that promises future economic benefit, usually exceeding it’s opportunity cost.
An increase in taxes lowers your profit, so it does not directly affect capital.
A decrease in debt lowers your expenses and liabilites, so it’s not a capital investment.
 
MrSmart wrote:
An increase in inventory, since inventory is a capital investment.
A capital investment is any asset that promises future economic benefit, usually exceeding it’s opportunity cost.
An increase in taxes lowers your profit, so it does not directly affect capital.
A decrease in debt lowers your expenses and liabilites, so it’s not a capital investment.
Click to expand...
Are you sure about this? I think inventory is a working capital investment. Capital investments are “Money invested in a business venture with an expectation of income, and recovered through earnings generated by the business over several years.” I don’t think inventory falls in to this definition.
I’m gonna go with ‘C’. An increase in YTM result in a decrease in market value of firms debt. Since other answers are not deal with capital structure, I think C is the answer. Don’t know what it has to do with increase in capital investment though. To maintain the current level of WACC additional capital investment is needed? I dunno…
May be I’m wrong.
 
An increase in Inventory is regarded as capital investment, thus an increase in it is equavalent to an increase in Capital Investment.
 
Pompey wrote:
MrSmart wrote:
An increase in inventory, since inventory is a capital investment.
A capital investment is any asset that promises future economic benefit, usually exceeding it’s opportunity cost.
An increase in taxes lowers your profit, so it does not directly affect capital.
A decrease in debt lowers your expenses and liabilites, so it’s not a capital investment.
Click to expand...
Are you sure about this? I think inventory is a working capital investment. Capital investments are “Money invested in a business venture with an expectation of income, and recovered through earnings generated by the business over several years.” I don’t think inventory falls in to this definition.
I’m gonna go with ‘C’. An increase in YTM result in a decrease in market value of firms debt. Since other answers are not deal with capital structure, I think C is the answer. Don’t know what it has to do with increase in capital investment though. To maintain the current level of WACC additional capital investment is needed? I dunno…
May be I’m wrong.
Click to expand...
Precisely! Capital investment can be either working capital, or fixed capital. The financing of this capital is either through debt, or equity. Invested capital on the balance sheet is the sum of all operating assets less the operating liabilities, the financing equivilent of the sum of all debt and equity (if we assume that direct financings for operating assets). Inventory is a current asset, all assets promise future economic benefit, but current assets promise them during one fiscal year. So they do fall under the definition of capital
A decrease of the market value of debt may imply two things that do not increase invested capital:
1) Interest rates have gone up
2) Cash was used to pay off debt
 
Does seem wonky, as I can’t make sense of that answer either.
But I don’t agree that investing in inventory is capital investment though. Investing in inventory doesn’t increase your working capital, it shifts it.
Dr Inventory 100
Cr Cash/AP 100
Inventory is NOT a capital asset. Working capital is unchanged.
 
Perhaps the idea is that an increase in the marginal tax rate will increase the benefit from depreciation, so a company would want to invest in more fixed assets. But that would make sense only if they expected that the marginal tax rate would decline later.
 
S2000magician wrote:
Perhaps the idea is that an increase in the marginal tax rate will increase the benefit from depreciation, so a company would want to invest in more fixed assets. But that would make sense only if they expected that the marginal tax rate would decline later.
Click to expand...
I agree.
I think the logic is here to demonstrate that you do not fail to understand that inventory is not capital investment and that a high marginal tax rate could be likely to influence financial officers to invest in capital and use the fiscal leverage effect.
 
tomicelli wrote:
S2000magician wrote:Perhaps the idea is that an increase in the marginal tax rate will increase the benefit from depreciation, so a company would want to invest in more fixed assets. But that would make sense only if they expected that the marginal tax rate would decline later.
Click to expand...
I agree.
I think the logic is here to demonstrate that you do not fail to understand that inventory is not capital investment and that a high marginal tax rate could be likely to influence financial officers to invest in capital and use the fiscal leverage effect.
Click to expand...
In any case, it seems to assume facts not in evidence.
 
I think you can proceed by eliminiation :
C:/ is calling debt when its market value is lower capital investment? no. Does market value of debt reduce interests expenses and liberate more cash for financing capital investment? no
A/ is inventory capital investment : no. end of the story.
B/ can a financial officer invest in capital to reduce marginal tax rate? Yes.
 
geo wrote:
Does seem wonky, as I can’t make sense of that answer either.
But I don’t agree that investing in inventory is capital investment though. Investing in inventory doesn’t increase your working capital, it shifts it.
Dr Inventory 100
Cr Cash/AP 100
Inventory is NOT a capital asset. Working capital is unchanged.
Click to expand...
Of course it is. You are assuming that cash used to buy inventory is operating cash, not excess cash.
We usually seperate operating assets from non-operating assets in deriving working capital. For proper practice at least. Excess cash is a non-operating asset. Their use for the purchase of inventory increase your working capital, and thus increase your capital investment.
S2000magician wrote:
Perhaps the idea is that an increase in the marginal tax rate will increase the benefit from depreciation, so a company would want to invest in more fixed assets. But that would make sense only if they expected that the marginal tax rate would decline later.
Click to expand...
Tax shields crossed my mind, but then you have to fit in in your own assumptions.
I’m going to give OP the benefit of doubt. He might have misread the question for what will least likely lead to an increase in typical firms capital investment
 
^ Mr. Smart you have no idea what you’re talking about. You don’t separate excess cash from operating cash. What is this nonsense?
On the higher marginal tax rate piece, you’re more likely to expense things as opex under a higher tax environment. And run higher depreciation rates.
 
Of course you do.
I’ve never heard that the marginal tax rate was a bottle neck to more capex.
 
^ No, you really don’t. Absolutely not.
I’m not suggesting it is. I’m suggesting the Q is garbage.
 
You must log in or register to reply here.
Back
Top