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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 151
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 152
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 153
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 154
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 155
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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Question 156
An investor buys a call option with a $50 strike for a $3 premium. At expiration the underlying trades at $55. What is the option's intrinsic value and the investor's net profit per share?
Select an option first.
Correct answer: A — Intrinsic value $5; net profit $2
Explanation: Intrinsic value of a call = underlying price - strike = $55 - $50 = $5. Net profit = intrinsic value - premium paid = $5 - $3 = $2 per share. The call is in the money because the underlying exceeds the strike, and the profit is what remains after recovering the premium.
Question 157
The spot exchange rate is $1.10 per euro. The one-year U.S. interest rate is 4% and the one-year euro interest rate is 2%. Using covered interest rate parity, what is the approximate one-year forward rate (USD per euro)?
Select an option first.
Correct answer: C — $1.122
Explanation: Forward = spot x (1 + domestic rate) / (1 + foreign rate) = $1.10 x (1.04 / 1.02) = $1.10 x 1.01961 = $1.1216, about $1.122. Because the U.S. rate exceeds the euro rate, the euro trades at a forward premium against the dollar. Covered interest rate parity prevents riskless arbitrage between the money and forward markets.
Question 158
When two mutually exclusive projects give conflicting rankings under NPV and IRR, which method should generally be relied upon and why?
Select an option first.
Correct answer: B — NPV, because it measures the dollar value added and assumes reinvestment at the cost of capital
Explanation: NPV is generally preferred for mutually exclusive projects because it directly measures the absolute increase in firm value and assumes intermediate cash flows are reinvested at the cost of capital, a more realistic assumption. IRR can rank projects incorrectly due to differences in scale or timing and its implicit reinvestment at the IRR itself. When the two conflict, choose the project with the higher NPV.
Question 159
Compared with a laddered portfolio, a barbell strategy concentrates holdings in:
Select an option first.
Correct answer: B — Short-term and long-term maturities, with little in the intermediate range
Explanation: A barbell places funds at the two ends of the maturity spectrum, short-term securities for liquidity and long-term securities for higher yield, while underweighting the middle. It offers flexibility to respond to rate changes at the short end while capturing yield at the long end. A ladder, by contrast, distributes maturities evenly across the horizon.
Question 160
A treasury manager expects interest rates to rise. To reduce the portfolio's price sensitivity to that increase, the manager should generally:
Select an option first.
Correct answer: B — Shorten the portfolio's average duration
Explanation: Duration measures a portfolio's price sensitivity to interest-rate changes; longer duration means larger price declines when rates rise. Anticipating rising rates, a manager shortens duration, shifting toward shorter maturities or floating-rate instruments, to limit market-value losses and enable reinvestment at higher rates. Extending duration would increase the loss.
Question 161
In evaluating an acquisition, the maximum price an acquirer should rationally pay for a target is best described as the target's:
Select an option first.
Correct answer: B — Standalone value plus the value of expected synergies
Explanation: The economic ceiling on the offer price is the target's intrinsic standalone value plus the present value of synergies the acquirer expects to create. Paying up to that amount preserves value for the acquirer only if synergies are actually realized; paying more transfers value to target shareholders. Overestimating synergies is a common cause of value-destroying acquisitions.
Question 162
In a leveraged buyout (LBO), the acquiring group typically:
Select an option first.
Correct answer: B — Uses a large proportion of borrowed funds, often secured by the target's assets and repaid from its cash flows
Explanation: An LBO finances the acquisition predominantly with debt, frequently secured against the target's assets and serviced by its operating cash flows. The high leverage amplifies returns to equity if the business performs but increases financial risk and the burden of debt service. Sponsors aim to improve operations and reduce debt over the holding period before exiting.
Question 163
A key difference between exchange-traded futures and over-the-counter forwards is that futures:
Select an option first.
Correct answer: B — Are standardized, marked to market daily, and use a clearinghouse to reduce counterparty risk
Explanation: Futures are standardized contracts traded on an exchange, marked to market daily with margin requirements, and guaranteed by a central clearinghouse that greatly reduces counterparty credit risk. Forwards are customized OTC agreements settled at maturity, exposing each side to the other's default risk. The daily settlement and clearing structure is the defining operational difference.
Question 164
A manufacturer hedges its future purchase of jet fuel using crude oil futures because no liquid jet-fuel contract is available. The residual risk that the price relationship between jet fuel and crude oil may change is called:
Select an option first.
Correct answer: B — Basis risk
Explanation: Using a related but not identical instrument to hedge is a cross hedge, and the risk that the hedged item's price and the hedging instrument's price do not move perfectly together is basis risk. If the jet-fuel-to-crude spread widens or narrows unexpectedly, the hedge will not fully offset the exposure. Basis risk is an inherent trade-off when a perfectly matched derivative is unavailable.
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