CTP Capital Structure and Funding 4

Question 1

Under Modigliani-Miller with taxes, the value of a levered firm equals the unlevered firm value plus:

Accepted Answer

The tax shield on debt (tax rate × debt)

Answer

MM with taxes shows that debt creates value through the interest tax shield, calculated as the corporate tax rate multiplied by the amount of debt outstanding.

Question 2

Which credit metric is most commonly used by rating agencies to assess leverage for industrial companies?

Accepted Answer

Net debt / EBITDA

Answer

Net debt-to-EBITDA is the primary leverage metric because it measures how many years of operating earnings are needed to repay net debt, adjusted for non-cash charges.

Question 3

A company wants to fund a long-term capital project but avoid balance sheet debt. Which off-balance sheet structure historically served this purpose?

Accepted Answer

Operating lease under old GAAP (pre-ASC 842)

Answer

Before ASC 842, operating leases were kept off-balance sheet, allowing companies to use assets without recording associated debt, though rating agencies typically adjusted for this.

Question 4

What is the primary difference between investment-grade and high-yield (junk) bond markets in terms of investor base?

Accepted Answer

Investment-grade bonds attract more price-sensitive institutional buyers like pension funds and insurance companies

Answer

Investment-grade bonds are dominated by regulated institutions (pension funds, insurance companies) with mandated quality requirements, creating a deep, liquid market with tighter spreads.

Question 5

A company's optimal capital structure is BEST described as the point where:

Accepted Answer

The marginal tax benefit of debt equals the marginal cost of financial distress

Answer

Trade-off theory identifies the optimal capital structure where the tax shield benefit from the last dollar of debt exactly offsets the incremental financial distress costs it creates.

Certified Treasury Professional Exam Practice Test

Certified Treasury Professional Exam Practice Test

CTP Capital Structure and Funding 4