CAT Corporate Finance & Investment 2

Question 1

A company has an after-tax cost of debt of 4%, a cost of equity of 10%, and a debt-to-equity ratio of 1:1. What is the WACC?

Accepted Answer

7%

Answer

With equal proportions (50% each), WACC = 0.5×4% + 0.5×10% = 7%.

Question 2

Which of the following best describes the 'pecking order theory' of capital structure?

Accepted Answer

Firms prefer internal financing first, then debt, then equity as a last resort

Answer

The pecking order theory states firms favor retained earnings, then debt, and issue new equity only as a last resort due to information asymmetry costs.

Question 3

A bond with a face value of $1,000, a coupon rate of 6%, and 5 years to maturity is trading at $950. Is the yield to maturity (YTM) higher or lower than 6%?

Accepted Answer

Higher than 6%

Answer

When a bond trades below par (at a discount), the YTM is higher than the coupon rate.

Question 4

Which investment appraisal technique explicitly accounts for the time value of money by discounting future cash flows?

Accepted Answer

Net Present Value (NPV)

Answer

NPV discounts all future cash flows back to their present value using the cost of capital.

Question 5

A project has an NPV of $0 at a discount rate of 12%. What does this imply?

Accepted Answer

The project's IRR equals 12%

Answer

The IRR is the discount rate at which NPV equals zero, so IRR = 12% in this case.

(CAT) Certified Accounting Technician Practice Test

(CAT) Certified Accounting Technician Practice Test

CAT Corporate Finance & Investment 2