Corporate Finance Questions and Answers in Quiz Form 7 for Practice

91. What is "cost of debt"?

1. The total amount a company pays to service its debt
2. The interest rate a company pays on its borrowings
3. The cost of equity plus debt
4. The discount rate used to calculate the present value of future cash flows

92. What does the "capital asset pricing model" (CAPM) help determine?

1. The cost of debt
2. The expected return on an investment based on its risk
3. The value of an asset based on future earnings
4. The profitability of a company's capital projects

93. What does "debt covenants" refer to?

1. Legal restrictions placed on a company to protect bondholders
2. The debt obligations a company has to meet
3. The company's preferred method of issuing bonds
4. The repayment schedule of a company’s debt

94. What is the "tax shield" effect of debt?

1. The tax reduction benefit due to interest expense deductions
2. The increase in a company's dividends due to interest payments
3. The reduction in capital gains tax due to debt financing
4. The benefit of lower interest rates due to higher debt

95. What is the "return on investment" (ROI) formula?

1. Net income / Total assets
2. Operating income / Total assets
3. Net income / Total investment
4. Gross income / Total sales

96. What does "dividend reinvestment" (DRIP) allow shareholders to do?

1. Purchase additional shares using their dividends
2. Receive dividends in cash
3. Convert dividends into preferred stock
4. Sell their dividends on the open market

97. What is the "total debt ratio"?

1. Total liabilities / Total assets
2. Long-term debt / Total equity
3. Current liabilities / Total liabilities
4. Short-term debt / Total assets

98. Which of the following is the most significant disadvantage of using debt financing?

1. Increased ownership control for shareholders
2. The fixed obligation of interest payments
3. The dilution of ownership rights
4. The complexity of issuing bonds

99. What is the "equity multiplier"?

1. Total equity / Total debt
2. Total assets / Total equity
3. Debt / Total assets
4. Net income / Shareholder equity

100. What does "financial leverage" allow a company to do?

1. Use equity to reduce risks
2. Use debt to magnify returns to shareholders
3. Minimize debt and increase equity
4. Increase the company's cash flow from operations