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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 91
A bond is generally considered investment grade if it is rated at least:
Select an option first.
Correct answer: B — BBB- by S&P or Baa3 by Moody's
Explanation: The investment-grade boundary is BBB- (S&P/Fitch) or Baa3 (Moody's); ratings below that are classified as speculative grade or high yield. Investment-grade issuers generally enjoy lower borrowing costs and access to a broader investor base. Falling below the threshold ('fallen angel') typically raises spreads and can trigger forced selling by rating-constrained investors.
Question 92
A call provision on a bond primarily benefits the:
Select an option first.
Correct answer: B — Issuer, by allowing redemption before maturity, typically when rates fall
Explanation: A call feature gives the issuer the right to redeem the bond before maturity at a set price. Issuers exercise calls when interest rates decline so they can refinance at a lower cost. Because this option works against investors, callable bonds usually carry higher yields than comparable non-callable bonds.
Question 93
A put provision on a bond gives the:
Select an option first.
Correct answer: B — Investor the right to sell the bond back to the issuer at a set price before maturity
Explanation: A put option lets the bondholder require the issuer to repurchase the bond at a predetermined price on specified dates. It protects investors if rates rise or credit quality deteriorates. Because it favors investors, putable bonds typically offer lower yields than otherwise comparable bonds.
Question 94
A sinking fund provision in a bond indenture requires the issuer to:
Select an option first.
Correct answer: B — Retire portions of the bond issue on a scheduled basis before final maturity
Explanation: A sinking fund obligates the issuer to redeem or repurchase a specified portion of the outstanding bonds periodically, reducing the principal owed at final maturity. This lowers the lump-sum refinancing (balloon) risk and provides investors added assurance of repayment. It is part of ongoing post-issuance compliance with the indenture.
Question 95
An initial public offering (IPO) is best described as:
Select an option first.
Correct answer: A — A company's first sale of its stock to the public
Explanation: An IPO is the first time a private company offers its shares to public investors, typically to raise capital and provide liquidity to early investors. It involves registration with securities regulators, underwriting, and price discovery. Subsequent public issues by the same firm are called seasoned or follow-on offerings.
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Question 96
A seasoned (follow-on) equity offering refers to:
Select an option first.
Correct answer: B — A sale of additional new shares by a company that is already publicly traded
Explanation: A seasoned or follow-on offering is the issuance of additional shares by a company whose stock already trades publicly. It can raise new capital (primary shares) or let existing holders sell (secondary shares). Because a market price already exists, pricing is generally more straightforward than in an IPO.
Question 97
In a firm-commitment underwriting, the investment bank:
Select an option first.
Correct answer: B — Purchases the entire issue from the company and resells it to investors, bearing the risk of unsold shares
Explanation: Under a firm-commitment arrangement, the underwriter buys the whole offering at a negotiated price and assumes the risk of reselling it to the public. The spread between the purchase price and the resale price is the underwriter's compensation. If shares go unsold, the underwriter absorbs the loss, unlike a best-efforts deal.
Question 98
A rights offering gives existing shareholders:
Select an option first.
Correct answer: B — The right to buy new shares, usually at a discount, in proportion to their current holdings
Explanation: A rights offering distributes to current shareholders the right to purchase newly issued shares, typically at a price below the current market, in proportion to their existing ownership. This lets shareholders maintain their proportional stake and avoid dilution. Rights are often transferable and can be sold to other investors.
Question 99
A credit spread on a corporate bond is best defined as:
Select an option first.
Correct answer: B — The yield premium over a comparable-maturity benchmark (such as a Treasury) that compensates for credit risk
Explanation: A credit spread is the additional yield a corporate bond offers above a risk-free benchmark of similar maturity, compensating investors for default and liquidity risk. Wider spreads indicate greater perceived risk or deteriorating market conditions, while tighter spreads reflect confidence. Spreads are a key input to a borrower's expected cost of debt.
Question 100
In current U.S. markets, a widely used benchmark reference rate for floating-rate corporate borrowing is:
Select an option first.
Correct answer: B — SOFR (Secured Overnight Financing Rate)
Explanation: SOFR, the Secured Overnight Financing Rate, is a broad measure of the cost of overnight borrowing collateralized by Treasury securities and has become the principal benchmark for floating-rate loans and derivatives, replacing LIBOR. Floating-rate debt is typically priced as SOFR plus a credit spread. Benchmark rates provide a transparent, market-based reference for setting borrowing costs.
Question 101
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 102
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 103
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 104
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 105
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 106
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 107
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 108
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 109
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 110
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 111
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 112
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 113
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 114
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 115
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 116
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 117
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 118
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 119
A company has net income of $12 million and 6 million shares outstanding. It repurchases 1 million shares. Ignoring any financing cost, what is the new earnings per share?
Select an option first.
Correct answer: B — $2.40
Explanation: Before the buyback, EPS = $12 million / 6 million = $2.00. After repurchasing 1 million shares, shares outstanding fall to 5 million, so EPS = $12 million / 5 million = $2.40. Reducing the share count raises EPS when net income is unchanged, one reason firms use buybacks.
Question 120
A company reports net income of $10 million and pays total dividends of $4 million. What is its dividend payout ratio?
Select an option first.
Correct answer: B — 40%
Explanation: Dividend payout ratio = dividends / net income = $4 million / $10 million = 0.40, or 40%. This means 40% of earnings are distributed to shareholders and the remaining 60% (the retention ratio) is reinvested in the business. The payout ratio reflects the firm's balance between returning cash and funding growth.
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