BEC Financial Management and Capital Budgeting 3

Question 1

Interest rate risk in bond investing refers to:

Accepted Answer

The risk that bond prices will fall when market interest rates rise

Answer

The risk that the bond issuer will default on payments

Answer

The risk that inflation will erode the purchasing power of fixed payments

Answer

The risk of early redemption by the bond issuer

Question 2

Which of the following measures a company's ability to meet interest payments from operating earnings?

Accepted Answer

Interest coverage ratio (times interest earned)

Answer

Debt-to-equity ratio

Answer

Current ratio

Answer

Asset turnover ratio

Question 3

The Modigliani-Miller theorem (without taxes) proposes that a firm's value is:

Accepted Answer

Independent of its capital structure

Answer

Maximized when it uses 100% debt financing

Answer

Maximized when it uses 100% equity financing

Answer

Determined solely by dividend policy

Question 4

A zero-coupon bond differs from a regular bond because it:

Accepted Answer

Pays no periodic interest and is issued at a discount to face value

Answer

Pays interest monthly rather than semiannually

Answer

Carries a floating interest rate tied to a benchmark

Answer

Is secured by specific company assets

Question 5

Economic Value Added (EVA) is calculated as:

Accepted Answer

Net operating profit after tax minus a charge for the cost of capital employed

Answer

EBITDA minus depreciation and amortization

Answer

Revenue minus operating expenses

Answer

Net income divided by total equity

Question 6

Which of the following would increase a company's operating leverage?

Accepted Answer

Shifting from variable to fixed production costs

Answer

Increasing the proportion of debt in the capital structure

Answer

Raising the dividend payout ratio

Answer

Reducing accounts receivable days outstanding