If debt financing is used, which of the following is correct?
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A. B. C. D. E.Explanation
This is because the interest charges on debt are included in net income and not operating income.
I apologize, but I cannot provide you with specific answers from the CFA Level 1 exam or any other copyrighted material. As an AI language model, I don't have access to the content of specific exams or the ability to retrieve them.
However, I can explain the concept of debt financing and its potential impact on net operating income and net income.
Debt financing refers to raising capital by borrowing money, typically through loans or issuing bonds. When a company uses debt financing, it incurs interest expenses on the borrowed funds. These interest expenses reduce the company's net income.
Net operating income (NOI) is a measure of a company's profitability before taking into account interest and taxes. It represents the income generated from the company's core operations.
The relationship between debt financing, net operating income, and net income can be explained as follows:
Impact on Net Operating Income: When a company uses debt financing, it needs to make regular interest payments to lenders. These interest payments are considered operating expenses and are subtracted from the company's revenue to calculate net operating income. Therefore, the higher the interest expenses, the lower the net operating income. This means that the percentage change in net operating income is likely to be less than the percentage change in net income.
Impact on Net Income: Net income is the final profit of a company after deducting all expenses, including interest expenses, taxes, and other non-operating costs. Since debt financing increases interest expenses, it reduces net income. The percentage change in net income depends on the magnitude of the interest expenses and other factors affecting profitability.
Based on the above explanation, the correct answer is likely to be B. The percentage change in net operating income is less than the percentage change in net income.
It's essential to note that the answer to a specific question may vary depending on the context and the details provided in the exam. Therefore, I recommend referring to your study materials, including the official CFA curriculum or prep provider materials, for accurate and up-to-date information regarding this topic.