CBS Corporate Finance & Investment 2 — Questions and Answers
Question 1: A company has EBIT of $500,000, interest expense of $100,000, and a tax rate of 25%. What is the net income?
- $300,000 (Correct answer)
- $375,000
- $400,000
- $500,000
Correct answer: $300,000
EBIT minus interest gives EBT of $400,000; after 25% tax, net income is $300,000.
Question 2: Which capital budgeting method accounts for the time value of money and gives a dollar-value result?
- Payback Period
- Accounting Rate of Return
- Net Present Value (Correct answer)
- Profitability Index
Correct answer: Net Present Value
NPV discounts all future cash flows to present value and expresses the result in dollars.
Question 3: A firm's debt-to-equity ratio is 1.5. If total equity is $400,000, what is total debt?
- $266,667
- $400,000
- $600,000 (Correct answer)
- $1,000,000
Correct answer: $600,000
Debt = D/E ratio × Equity = 1.5 × $400,000 = $600,000.
Question 4: What does the term 'capital structure' refer to in corporate finance?
- The physical assets owned by a company
- The mix of debt and equity used to finance operations (Correct answer)
- The company's annual capital expenditure budget
- The breakdown of revenues by product line
Correct answer: The mix of debt and equity used to finance operations
Capital structure describes the proportion of debt versus equity a firm uses to fund its assets.
Question 5: Which of the following best describes the Internal Rate of Return (IRR)?
- The discount rate at which NPV equals zero (Correct answer)
- The average return on equity over five years
- The ratio of net income to total assets
- The minimum required return set by regulators
Correct answer: The discount rate at which NPV equals zero
IRR is the discount rate that makes the NPV of a project's cash flows equal to zero.
Question 6: A bond with a face value of $1,000 trades at $950 and has a coupon rate of 6%. What is the current yield?
- 5.70%
- 6.00%
- 6.32% (Correct answer)
- 6.60%
Correct answer: 6.32%
Current yield = Annual coupon / Market price = $60 / $950 ≈ 6.32%.
Question 7: In portfolio theory, diversification primarily reduces which type of risk?
- Systematic risk
- Market risk
- Unsystematic risk (Correct answer)
- Interest rate risk
Correct answer: Unsystematic risk
Diversification eliminates unsystematic (firm-specific) risk but cannot remove systematic market risk.
CBS Corporate Finance & Investment 2
A company has EBIT of $500,000, interest expense of $100,000, and a tax rate of 25%.
What is the net income?