CFA1_CI_2025_Part 1

Which of the following does not reflect a primary difference between an initial public offering (IPO) and a direct listing?

• Whether or not employees own shares in the private company.

• Whether or not new capital is raised.

• 1. Whether or not an underwriter is used.

Answer explanation

A is correct. A company with employee shareholders can go public with either an IPO or a direct listing; employee share ownership does not differ by the choice of transaction. C is incorrect. An IPO uses an underwriter to manage the process and underwrite the purchase of new shares, while a direct listing does not. B is incorrect. An IPO raises new capital for the listing company by issuing new shares to the public, while a direct listing does not; it lists only existing shares.

Benefits of effective corporate governance include all of the following except:

• Avoidance of fraud.

• Higher investor confidence.

• 1. Reduced cost of equity.

Answer explanation

A is correct. Effective corporate governance allows for the mitigation, not the avoidance, of risk factors such as fraud, or at least their identification and control at early stages. 

B and C are incorrect, as these are both benefits of effective corporate governance.

Changing its accounts receivable policy to extend credit to customers with lower creditworthiness will most likely result in:

• A pull on liquidity.

• A drag on liquidity.

• No effect on liquidity.

Answer explanation

B is correct. By extending credit to customers with lower creditworthiness, the company is likely to experience more delinquent or uncollectible accounts and an increase in days sales outstanding, resulting in a drag on liquidity. 

A is incorrect, because a pull on liquidity would result from an acceleration of cash outflows. In this case, the change to the company’s credit policy has the effect of slowing cash inflows. 

C is incorrect, because the change in the company’s accounts receivable policy would likely increase its working capital needs due to having higher accounts receivable.