CBS Corporate Finance & Investment 2

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?

Accepted Answer

$300,000

Answer

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?

Accepted Answer

Net Present Value

Answer

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?

Accepted Answer

$600,000

Answer

Debt = D/E ratio × Equity = 1.5 × $400,000 = $600,000.

Question 4

What does the term 'capital structure' refer to in corporate finance?

Accepted Answer

The mix of debt and equity used to finance operations

Answer

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)?

Accepted Answer

The discount rate at which NPV equals zero

Answer

IRR is the discount rate that makes the NPV of a project's cash flows equal to zero.

(CBS) Certified Budget Specialist Practice Test