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Free Questions › CTP › Capital Structure and Long-Term Financing
Free CTP Capital Structure and Long-Term Financing Practice Questions & Answers
150 exam-style Capital Structure and Long-Term Financing questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 31
Compared with fixed-rate debt, floating-rate debt exposes the borrower primarily to:
Select an option first.
Correct answer: B — The risk that its interest cost rises if benchmark rates increase
Explanation: Floating-rate debt resets its coupon with a benchmark rate, so the borrower's interest expense rises when rates go up and falls when they go down. This creates cash-flow uncertainty compared with fixed-rate debt, where the coupon is locked. Borrowers often use interest-rate swaps to convert floating exposure to fixed when they want predictability.
Question 32
All else equal, high-yield (speculative-grade) issuers compared with investment-grade issuers generally face:
Select an option first.
Correct answer: B — Wider credit spreads and higher borrowing costs
Explanation: High-yield issuers carry greater default risk, so investors demand a larger yield premium, resulting in wider credit spreads and higher borrowing costs than investment-grade issuers. Spreads also tend to widen more for high-yield names when market conditions deteriorate. This risk-based pricing is a core feature of credit markets.
Question 33
A forward contract is best described as:
Select an option first.
Correct answer: B — A customized, over-the-counter agreement to buy or sell an asset at a set price on a future date
Explanation: A forward is a private, customizable agreement between two parties to exchange an asset at a predetermined price on a specified future date. Unlike futures, forwards are traded over the counter, are not marked to market daily, and carry counterparty credit risk. Their flexibility makes them useful for tailored hedging of specific exposures.
Question 34
In a plain-vanilla interest-rate swap, the two counterparties typically exchange:
Select an option first.
Correct answer: B — Fixed interest payments for floating interest payments on a notional amount
Explanation: In a standard interest-rate swap, one party pays a fixed rate and receives a floating rate, while the other does the reverse, with payments calculated on an agreed notional principal that is usually not exchanged. It lets a borrower convert floating-rate exposure to fixed, or vice versa, without refinancing the underlying debt. Only the net interest difference changes hands on each settlement date.
Question 35
The buyer of a call option has the:
Select an option first.
Correct answer: B — Right, but not the obligation, to buy the underlying asset at the strike price
Explanation: A call option gives its holder the right, but not the obligation, to purchase the underlying asset at the predetermined strike price before or at expiration. The buyer profits when the asset's price rises above the strike plus the premium paid. The most the buyer can lose is the premium, while the upside is theoretically unlimited.
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Question 36
On which date must an investor own a stock to be entitled to receive a declared dividend?
Select an option first.
Correct answer: C — On or before the record date (buying before the ex-dividend date)
Explanation: To receive a dividend, an investor must be a shareholder of record on the record date, which requires buying the stock before the ex-dividend date given standard settlement. On and after the ex-dividend date, the stock trades without the right to the upcoming dividend, and its price typically drops by roughly the dividend amount. The declaration and payment dates bracket this timeline but do not determine eligibility.
Question 37
Which of the following is a common method for a company to repurchase its own shares?
Select an option first.
Correct answer: B — An open-market repurchase program
Explanation: Open-market repurchase programs, in which the company buys back its shares gradually through the market, are the most common buyback method. Other methods include fixed-price tender offers and Dutch-auction tender offers. Repurchases return cash to shareholders and, by reducing share count, can increase earnings per share, offering flexibility relative to committing to a recurring dividend.
Question 38
A stock dividend differs from a cash dividend in that a stock dividend:
Select an option first.
Correct answer: A — Pays shareholders in additional shares rather than cash, leaving total equity unchanged
Explanation: A stock dividend distributes additional shares to existing holders instead of cash, increasing the number of shares outstanding while total shareholders' equity and the firm's assets remain unchanged. Each shareholder's proportional ownership stays the same, and the per-share price adjusts downward. Unlike a cash dividend, it does not transfer cash out of the company.
Question 39
A firm is financed 60% equity and 40% debt. Its cost of equity is 12%, its pre-tax cost of debt is 8%, and its tax rate is 25%. What is its WACC?
Select an option first.
Correct answer: A — 9.6%
Explanation: WACC = (0.60 x 12%) + (0.40 x 8% x (1 - 0.25)) = 7.2% + (0.40 x 6.0%) = 7.2% + 2.4% = 9.6%. The debt cost is reduced by the tax shield because interest is tax-deductible. The equity weight contributes the larger share here.
Question 40
Using the CAPM, if the risk-free rate is 3%, a stock's beta is 1.2, and the market risk premium is 6%, what is the cost of equity?
Select an option first.
Correct answer: C — 10.2%
Explanation: CAPM: cost of equity = risk-free rate + beta x market risk premium = 3% + (1.2 x 6%) = 3% + 7.2% = 10.2%. Beta above 1.0 means the stock is more volatile than the market, raising its required return above the risk-free rate plus the base premium.
Question 41
A company issues bonds with a 7% pre-tax coupon yield and faces a 30% marginal tax rate. What is its after-tax cost of debt?
Select an option first.
Correct answer: B — 4.9%
Explanation: After-tax cost of debt = pre-tax rate x (1 - tax rate) = 7% x (1 - 0.30) = 7% x 0.70 = 4.9%. Because interest expense is deductible, the effective cost to the firm is lower than the coupon rate. This is why debt is often the cheapest source of capital.
Question 42
A stock is expected to pay a dividend of $2.00 next year, trades at $40.00, and its dividends are expected to grow 5% per year indefinitely. Using the dividend growth model, what is the cost of equity?
Select an option first.
Correct answer: C — 10.0%
Explanation: The Gordon dividend growth model gives cost of equity = (D1 / P0) + g = ($2.00 / $40.00) + 0.05 = 0.05 + 0.05 = 0.10, or 10.0%. The first term is the dividend yield and the second is the constant growth rate. This method is an alternative to CAPM for estimating the required return on equity.
Question 43
A company has a $100 million revolving credit facility and has drawn $30 million. The commitment (unused) fee is 0.375% per year on the undrawn amount. What is the annual commitment fee?
Select an option first.
Correct answer: C — $262,500
Explanation: The undrawn balance is $100 million - $30 million = $70 million. The commitment fee = $70 million x 0.375% = $262,500 per year. Commitment fees compensate lenders for keeping capital available even when it is not borrowed.
Question 44
A borrower draws $20 million under a revolver priced at SOFR plus a 250 basis point spread. If SOFR is 4.50%, what is the approximate annual interest cost on the drawn amount?
Select an option first.
Correct answer: B — $1,400,000
Explanation: The all-in rate = 4.50% + 2.50% = 7.00%. Annual interest = $20 million x 7.00% = $1,400,000. Drawn balances on a revolver accrue interest at the benchmark rate plus the credit spread, while undrawn amounts accrue only the commitment fee.
Question 45
A bond has a $1,000 face value, pays a 5% annual coupon, matures in 3 years, and the market yield to maturity is 6%. What is its approximate price?
Select an option first.
Correct answer: C — $973.27
Explanation: Price = 50/1.06 + 50/1.06^2 + 1,050/1.06^3 = 47.17 + 44.50 + 881.60 = $973.27. Because the yield (6%) exceeds the coupon (5%), the bond trades at a discount to par. Bond prices move inversely to yields.
Question 46
A bond with a $1,000 face value and an annual coupon of $60 is trading at $800. What is its current yield?
Select an option first.
Correct answer: B — 7.5%
Explanation: Current yield = annual coupon / current price = $60 / $800 = 0.075, or 7.5%. Current yield measures the cash income relative to the price paid but ignores capital gain or loss to maturity. Because the bond trades below par, its current yield exceeds its 6% coupon rate.
Question 47
A bond has a $1,000 face value, a $70 annual coupon, 5 years to maturity, and currently trades at $950. Using the approximate yield-to-maturity formula, what is its YTM?
Select an option first.
Correct answer: C — 8.2%
Explanation: Approximate YTM = [C + (F - P)/n] / [(F + P)/2] = [70 + (1,000 - 950)/5] / [(1,000 + 950)/2] = [70 + 10] / 975 = 80/975 = 8.2%. The discount to par adds an annualized capital gain of $10 to the coupon income. YTM exceeds the current yield because of that pull to par.
Question 48
A company has 4 million shares outstanding trading at $25 each. It launches a rights offering to issue 1 new share for every 4 held, at a subscription price of $20. What is the theoretical ex-rights price (TERP)?
Select an option first.
Correct answer: C — $24.00
Explanation: New shares issued = 4 million / 4 = 1 million. Total value after the offering = (4,000,000 x $25) + (1,000,000 x $20) = $100 million + $20 million = $120 million, over 5 million shares. TERP = $120 million / 5 million = $24.00 per share, reflecting modest dilution from the below-market subscription price.
Question 49
A stock trades at $30 (rights-on). A rights offering lets shareholders buy 1 new share at a subscription price of $24 for every 3 shares held. What is the theoretical value of one right?
Select an option first.
Correct answer: C — $1.50
Explanation: With a rights-on price, value of one right = (market price - subscription price) / (rights needed per new share + 1) = ($30 - $24) / (3 + 1) = $6 / 4 = $1.50. Each of the three existing shares carries one right, and four rights of value combine to reflect the discount. The right has value because it permits purchase below market.
Question 50
A project requires an initial outlay of $1,000 and returns $500 at the end of each of the next 3 years. At a 10% discount rate, what is its approximate NPV?
Select an option first.
Correct answer: B — $243
Explanation: The present value of a 3-year, $500 annuity at 10% = $500 x 2.48685 = $1,243.43. NPV = $1,243.43 - $1,000 = $243.43, approximately $243. Because NPV is positive, the project earns more than the 10% required return and should be accepted.
Question 51
A project costs $1,000 and produces cash flows of $300, $400, $500, and $600 in years 1 through 4. What is its payback period?
Select an option first.
Correct answer: A — 2.6 years
Explanation: Cumulative cash flow reaches $300 after year 1 and $700 after year 2, leaving $300 to recover. Year 3 provides $500, so the remaining amount is recovered in $300/$500 = 0.6 of the year. Payback = 2 + 0.6 = 2.6 years.
Question 52
A project requires $1,000 today and returns a single cash flow of $1,210 in exactly two years. What is its internal rate of return?
Select an option first.
Correct answer: B — 10.0%
Explanation: Set NPV to zero: $1,000 = $1,210 / (1 + IRR)^2. Solving, (1 + IRR)^2 = 1.21, so 1 + IRR = 1.10 and IRR = 10.0%. The IRR is the compound annual return that equates the outflow with the discounted inflow.
Question 53
What is the present value of $10,000 to be received in 5 years, discounted at 8% per year?
Select an option first.
Correct answer: A — $6,806
Explanation: PV = FV / (1 + r)^n = $10,000 / (1.08)^5 = $10,000 / 1.46933 = $6,805.83, approximately $6,806. Discounting reflects that a dollar received in the future is worth less than a dollar today. The higher the rate or the longer the horizon, the smaller the present value.
Question 54
A portfolio holds $2 million yielding 3%, $3 million yielding 4%, and $5 million yielding 5%. What is the portfolio's weighted average yield?
Select an option first.
Correct answer: B — 4.3%
Explanation: Total interest = (2 x 3%) + (3 x 4%) + (5 x 5%) = 6 + 12 + 25 = 43 (in $ hundred-thousands of income units) on $10 million. Weighted average yield = 43 / 10 = 4.3%. The largest allocation, to the 5% holding, pulls the average toward the high end.
Question 55
A 90-day Treasury bill with a $1,000 face value is purchased for $980. Using a 365-day year, what is its approximate bond-equivalent yield?
Select an option first.
Correct answer: C — 8.28%
Explanation: Bond-equivalent yield = (discount / price) x (365 / days) = ($20 / $980) x (365 / 90) = 0.020408 x 4.0556 = 0.0828, or about 8.28%. Unlike the discount yield, the BEY bases the return on the purchase price and uses a 365-day year, giving a figure comparable to coupon-bearing securities.
Question 56
Acquirer A has net income of $50 million and 10 million shares (EPS $5.00). It acquires Target B, which has net income of $10 million, by issuing 1 million new shares. Ignoring synergies and financing costs, what is the combined EPS?
Select an option first.
Correct answer: B — $5.45
Explanation: Combined net income = $50 million + $10 million = $60 million. Combined shares = 10 million + 1 million = 11 million. Combined EPS = $60 million / 11 million = $5.45, which is higher than the acquirer's standalone $5.00, so the deal is accretive to EPS. Accretion arises because the earnings added exceed the proportional dilution from new shares.
Question 57
A company has a market capitalization of $800 million, total debt of $300 million, and cash of $100 million. What is its enterprise value (EV)?
Select an option first.
Correct answer: B — $1,000 million
Explanation: Enterprise value = market capitalization + total debt - cash = $800 million + $300 million - $100 million = $1,000 million. EV represents the theoretical takeover cost, since an acquirer assumes the debt but gains the cash. It is the numerator basis for multiples such as EV/EBITDA used in valuation.
Question 58
A company issues a floating-rate note priced at SOFR plus 180 basis points. If SOFR is currently 5.20%, what is the current all-in coupon rate?
Select an option first.
Correct answer: C — 7.00%
Explanation: 180 basis points equals 1.80%. All-in rate = 5.20% + 1.80% = 7.00%. Floating-rate coupons reset periodically as the benchmark changes, so the all-in cost moves with SOFR while the credit spread stays fixed.
Question 59
A corporate bond yields 6.20% while the comparable-maturity Treasury yields 4.00%. What is the credit spread in basis points?
Select an option first.
Correct answer: C — 220 basis points
Explanation: Credit spread = corporate yield - benchmark yield = 6.20% - 4.00% = 2.20%. Since one percentage point equals 100 basis points, 2.20% = 220 basis points. The spread compensates investors for the corporate issuer's additional credit and liquidity risk relative to the risk-free Treasury.
Question 60
A company holds a $50 million notional interest-rate swap on which it pays a fixed 3.5% and receives floating SOFR. If SOFR resets to 4.5% for the period, what is the company's approximate net annual settlement?
Select an option first.
Correct answer: B — It receives $500,000
Explanation: The company receives floating (4.5%) and pays fixed (3.5%), so the net rate received = 4.5% - 3.5% = 1.0%. On $50 million notional, net settlement = $50 million x 1.0% = $500,000 received. When the floating rate exceeds the fixed rate, the fixed-rate payer/floating receiver comes out ahead.
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