CTP Capital Structure and Funding 3

Question 1

Which bond covenant directly restricts a company from taking on additional debt beyond a specified level?

Accepted Answer

Debt incurrence covenant

Answer

A debt incurrence covenant restricts the issuer from incurring additional indebtedness unless certain financial tests (e.g., fixed charge coverage ratio) are satisfied.

Question 2

What is 'mezzanine financing' in the context of capital structure?

Accepted Answer

Hybrid debt-equity instruments subordinated to senior debt but senior to equity

Answer

Mezzanine financing occupies the middle of the capital structure, typically structured as subordinated debt with equity kickers like warrants, offering higher returns than senior debt.

Question 3

A company's book value of equity is $200M and market capitalization is $600M. Which value should a treasurer use when calculating WACC?

Accepted Answer

Market value, because it reflects current required returns

Answer

WACC should use market values for both debt and equity because they reflect current investor expectations and the opportunity cost of capital, not historical accounting figures.

Question 4

What is the 'debt capacity' concept in corporate treasury?

Accepted Answer

The amount of debt a firm can carry while maintaining its credit rating and financial flexibility

Answer

Debt capacity is the optimal or maximum debt level a company can support given its cash flow stability, asset base, and need to maintain investment-grade status or financial flexibility.

Question 5

Which of the following is an advantage of issuing preferred stock over common equity?

Accepted Answer

Preferred stock does not dilute common shareholders' voting rights

Answer

Preferred stock carries dividend and liquidation preference over common stock but typically carries no voting rights, preserving existing shareholders' control.

Certified Treasury Professional Exam Practice Test

Certified Treasury Professional Exam Practice Test

CTP Capital Structure and Funding 3