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Corporate Finance Structure Flashcards

7 cards from real CPFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Corporate Finance Structure flashcards as text

  1. A firm has a tax rate of 25% and pays 8% on its debt. What is its after-tax cost of debt?

    Answer: 6.0%

    After-tax cost of debt is 8% × (1 − 0.25) = 6%.

  2. The degree of financial leverage (DFL) measures the sensitivity of which figure to changes in operating income?

    Answer: Earnings per share (EPS)

    DFL measures how EPS changes in response to changes in EBIT (operating income).

  3. Business risk, as distinct from financial risk, arises primarily from what?

    Answer: The inherent uncertainty of the firm's operations and revenues

    Business risk stems from operating uncertainty independent of how the firm is financed.

  4. A company can finance a project with debt at 7% or equity at 13%. Ignoring risk changes, which lowers near-term reported WACC more, and why?

    Answer: Debt, because it is cheaper and tax-deductible

    Debt has a lower rate and a tax shield, reducing WACC more than equity.

  5. Convertible bonds give holders the right to do what?

    Answer: Exchange the bonds for a set number of common shares

    Convertible bonds can be exchanged for a predetermined number of the issuer's common shares.

  6. Which scenario most increases a firm's financial risk?

    Answer: Taking on a large amount of fixed-interest debt

    Adding fixed-interest debt increases mandatory payments and therefore financial risk.

  7. Retained earnings are considered a source of financing that is part of which category?

    Answer: Internal equity

    Retained earnings represent reinvested profits and are a form of internal equity financing.