CFC Capital Structure & Funding 2

Question 1

A company has a debt-to-equity ratio of 1.5 and a tax rate of 30%. If the cost of debt is 6%, what is the tax shield benefit per dollar of debt?

Accepted Answer

$0.018

Answer

The tax shield per dollar of debt equals the interest rate multiplied by the tax rate: 0.06 × 0.30 = $0.018.

Question 2

Which capital structure theory argues that in the absence of taxes and bankruptcy costs, capital structure is irrelevant to firm value?

Accepted Answer

Modigliani-Miller theorem

Answer

The Modigliani-Miller theorem (1958) proposes that under perfect market conditions without taxes or bankruptcy costs, capital structure does not affect firm value.

Question 3

A company's EBIT is $500,000 and it has $2,000,000 in debt at 8% interest. What is the degree of financial leverage (DFL)?

Accepted Answer

1.47

Answer

DFL = EBIT / (EBIT - Interest) = $500,000 / ($500,000 - $160,000) = $500,000 / $340,000 ≈ 1.47.

Question 4

Under the pecking order theory, which funding source do firms prefer LAST?

Accepted Answer

Equity issuance

Answer

Pecking order theory holds that firms prefer internal funds first, then debt, and finally external equity as a last resort due to information asymmetry costs.

Question 5

A mezzanine financing instrument that converts to equity if not repaid by maturity is best described as:

Accepted Answer

Convertible subordinated debenture

Answer

A convertible subordinated debenture is a mezzanine instrument that starts as debt but can convert to equity, blending characteristics of both.

(CFC) Certified Financial Controller Practice Test

(CFC) Certified Financial Controller Practice Test

CFC Capital Structure & Funding 2