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

Interest rate risk is the inverse relationship between bond prices and market interest rates — when rates rise, existing bond prices fall, causing potential capital losses.

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

The interest coverage ratio (EBIT divided by interest expense) measures how many times operating earnings can cover the company's interest obligations.

Question 3

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

Accepted Answer

Independent of its capital structure

Answer

The Modigliani-Miller theorem states that in a perfect market without taxes, capital structure is irrelevant — the total firm value is unaffected by how it is financed.

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

A zero-coupon bond makes no periodic interest payments; instead, it is issued at a deep discount and redeemed at face value at maturity, with the difference representing the investor's return.

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

EVA equals NOPAT minus the dollar cost of capital (invested capital × WACC), measuring whether a company earns more than its true cost of capital.

BEC - Business Environment and Concepts Practice Test

BEC - Business Environment and Concepts Practice Test

BEC Financial Management and Capital Budgeting 3