ExpertMedium1 markMultiple Choice
CPA · Question 16 · Area I: Business Analysis
In a period of high inflation, which of the following companies would likely benefit the most in real terms?
In a period of high inflation, which of the following companies would likely benefit the most in real terms?
Answer options:
A.
A company with significant cash holdings.
B.
A company with long-term fixed-rate assets (receivables).
C.
A company with significant long-term fixed-rate debt.
D.
A company with low inventory turnover.
How to approach this question
Identify who wins/loses in inflation. Borrowers (fixed rate) win. Lenders/Savers lose.
Full Answer
C.A company with significant long-term fixed-rate debt.✓ Correct
C
Inflation erodes the purchasing power of currency. A borrower with fixed-rate debt pays back the principal and interest using dollars that are worth less than when they borrowed them. Thus, the real cost of the debt decreases.
Common mistakes
Thinking cash is safe during inflation (it loses value).
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