CFM Capital Structure & Debt Modeling

Question 1

What does the Weighted Average Cost of Capital (WACC) represent?

Accepted Answer

The blended cost of all capital sources, weighted by their proportion in the capital structure

Answer

The average interest rate a company pays on its outstanding debt

Answer

The return required by equity shareholders only

Answer

The risk-free rate adjusted for company-specific risk

Question 2

According to the Modigliani-Miller theorem in a world with no taxes, which statement is true?

Accepted Answer

A firm's total value is unaffected by its capital structure

Answer

A firm's value increases as it takes on more debt due to reduced equity risk

Answer

An optimal capital structure exists at 100% equity financing

Answer

Debt reduces the firm's cost of equity by lowering operating risk

Question 3

In a leveraged buyout (LBO) model, which tranche of debt typically carries the highest interest rate?

Accepted Answer

Mezzanine debt

Answer

Senior secured Term Loan A

Answer

Revolving credit facility

Answer

Investment-grade bonds

Question 4

A company has $600M in total debt and $300M in total equity. What is its debt-to-equity ratio?

Accepted Answer

2.0x

Answer

0.5x

Answer

1.0x

Answer

3.0x

Question 5

Which metric is most commonly used to assess a company's ability to cover interest payments from operating earnings?

Accepted Answer

Interest coverage ratio

Answer

Return on equity (ROE)

Answer

EBITDA-to-revenue ratio

Answer

Price-to-earnings ratio

Question 6

What is the primary purpose of building a debt schedule in a financial model?

Accepted Answer

To track outstanding debt balances, interest expense, and required repayments over time

Answer

To calculate the company's market capitalization over the forecast period

Answer

To determine the optimal dividend payout ratio for shareholders

Answer

To project future revenue growth rates by financing period

Question 7

Which of the following is NOT used when calculating the after-tax cost of debt?

Accepted Answer

The equity risk premium

Answer

The coupon rate on outstanding bonds

Answer

The marginal corporate tax rate

Answer

The yield to maturity on newly issued debt