CTP Capital Structure and Funding 2

Question 1

Which metric best measures a company's ability to service its debt obligations from operating cash flow?

Accepted Answer

Interest coverage ratio

Answer

The interest coverage ratio (EBIT divided by interest expense) directly measures how many times operating earnings can cover interest payments.

Question 2

A company issues $500 million in convertible bonds at a 2% coupon versus 5% for straight debt. What is the primary reason investors accept the lower coupon?

Accepted Answer

The embedded equity conversion option has value

Answer

Investors accept a below-market coupon on convertible bonds because the option to convert to equity has intrinsic value, compensating for the yield sacrifice.

Question 3

Under the pecking order theory of capital structure, what is a firm's FIRST preferred source of financing?

Accepted Answer

Internal retained earnings

Answer

Pecking order theory holds that firms prefer internal funds first because they avoid information asymmetry costs and flotation expenses associated with external financing.

Question 4

A leveraged buyout (LBO) typically uses what financing structure?

Accepted Answer

Primarily debt secured by the target's assets and cash flows

Answer

LBOs are characterized by high leverage, using the target company's assets as collateral and its future cash flows to service debt, maximizing equity returns.

Question 5

What is the primary purpose of a shelf registration (SEC Rule 415) in corporate finance?

Accepted Answer

To allow pre-registered securities to be issued quickly when market conditions are favorable

Answer

Shelf registration pre-approves securities with the SEC so companies can access capital markets rapidly without a full registration process each time.

Certified Treasury Professional Exam Practice Test

Certified Treasury Professional Exam Practice Test

CTP Capital Structure and Funding 2