Which of the following is the correct ordering of the capital stack (from most secure to least secure)?
7.
Which of the following is the correct ordering of the capital stack (from most secure to least secure)?
Senior debt-> Equity -> Subordinated debt
Subordinated debt-> Senior debt -> Equity
Senior debt -> Subordinated debt-> Equity
Equity -> Subordinated debt -> Senior debt
9.
Which of the following statements about capital structure are correct? Select ALL correct answers.
Having too much equity may dilute earnings and the value of the original investors.
A company should always finance its business using as much debt as possible in order to optimize the capital structure.
Having too little debt may increase the risk of default in repayment.
A company needs to consider the current economic climate when making decisions on debt and equity proportions.
Homework Answers
Question - 7
Senior debt -> Subordinate debt -> Equity.
Senior debt is most secured debt in a company usually fixed asset, floating asset comes under this category.
Question - 9.
1st and 4th options are correct.
A company should always finance its business using as much debt as possible in order to optimise the capital structure.
A company need to consider the current economic climate when making decisions on debt and equity proportions.
If you have any doubts please comment on the answer.
Which of the following best describes a best efforts underwriting commitment?
Your Answer
The underwriter agrees to buy the entire issue and assume full financial responsibility for any unsold shares.
Correct Answer
Underwriter commits to selling as much of the issue as possible at the agreed-on offering price but can return any unsold shares to the issuer without financial responsibility.
Explanation
In a best efforts underwriting commitment, the underwriter is allowed to return unsold shares to issuer.
2
Free Cash Flow | 100 |
Growth rate | 2% |
Tax Rate | 1% |
Cost of Capital | 5% |
Debt-to-total value | 50% |
Given the data in the above table, what is the terminal value of the business (using the growing perpetuity formula)?
Your Answer
3400
Correct Answer
3400
Explanation
Terminal Value = [Free Cash Flow X (1+growth)]/[(Cost of capital – growth)]
PV = [100 X (1+0.02)]/[0.05-0.02] = 3400
3
Cash | 100,000 |
Debt | 60,000 |
Tax Rate | 10% |
Discount Rate | 6% |
Enterprise Value | 500,000 |
Perpetual Growth Rate | 4% |
Given the data in the above table, calculate market capitalization of this hypothetical company.
Your Answer
$540,000
Correct Answer
$540,000
Explanation
Market capitalization = Enterprise value + Cash – Debt
Market capitalization = 500,000 + 100,000 - 60,000 = 540,000
4
Cost of Equity | 5% |
Cost of debt | 7% |
% Debt | 60% |
% Equity | 40% |
Given the data in the above table, what is the weighted average cost of capital of this company?
Your Answer
6.2%
Correct Answer
6.2%
Explanation
The Weighted Average Cost of Capital (WACC) is the proportion of debt and equity a firm has, multiplied by their respective costs.
WACC = (0.6 X 0.07) + (0.4 X 0.05 )= 0.062 = 6.2%
5
Which of the following companies has the lowest degree of leverage?
Your Answer
20% Debt, 80% Equity
Correct Answer
20% Debt, 80% Equity
Explanation
A company with the lowest degree of leverage has the lowest percentage of debt and the highest percentage of equity.
6
Which of the following statements is correct?
Your Answer
Financial buyers are institutions that provide capital and are not operators.
Correct Answer
Financial buyers are institutions that provide capital and are not operators.
Explanation
Financial buyers acquire a business to maximize equity returns but are not involved as operating partners.
7
Which of the following is the correct ordering of the capital stack (from most secure to least secure)?
Your Answer
Senior debt -> Subordinated debt-> Equity
Correct Answer
Senior debt -> Subordinated debt-> Equity
Explanation
Senior debt is the most secure security in the capital stack but also has the lowest return. In the event of bankruptcy, the senior debtholders have first priority in a company’s assets. Subordinated debt follows senior debt. In contrast, equity is the least secure but also has the highest return.
8
Which of the following debt repayment profiles involves a growing principal amount over time?
Your Answer
Pay in kind debt
Correct Answer
Pay in kind debt
Explanation
Pay in kind debt does not involve regular interest payments. All interest payments are accrued throughout the life of the loan and all interest payments, along with the principle, are paid at maturity.
9
Which of the following statements about capital structure are correct? Select ALL correct answers.
Your Answer
A company should always finance its business using as much debt as possible in order to optimize the capital structure.
A company needs to consider the current economic climate when making decisions on debt and equity proportions.
Correct Answer
A company needs to consider the current economic climate when making decisions on debt and equity proportions.
Having too much equity may dilute earnings and the value of the original investors.
Explanation
None.
10
Which of the following is NOT a form of subordinated debt?
Your Answer
Vendor Notes
Correct Answer
Revolver
Explanation
A revolver is a type of senior debt
11
Which of the following best describes a leveraged buyout fund’s acquisitions?
Your Answer
Investing in early stage businesses
Correct Answer
Investing in mature businesses
Explanation
LBO funds typically invest in more mature businesses, usually taking a controlling interest and leveraging the equity investment with a substantial amount of external debt.
12
Which of the following are examples of institutional investors? Select ALL correct answers.
Your Answer
Mutual funds
Correct Answer
Mutual funds
Private equity firms
Explanation
None.
13
Which of the following is not a function of public accounting firms?
Your Answer
Financial Planning & Analysis
Correct Answer
Financial Planning & Analysis
Explanation
FP&A is typically completed by corporate hires for established companies.
14
Which of the following M&A transaction equations is correct?
Your Answer
Value created = Stand-alone value + Net synergies – Consideration (price paid)
Correct Answer
Value created = Stand-alone value + Net synergies – Consideration (price paid)
Explanation
None.
15
What should a company do if it wants to reduce the number of shares outstanding?
Your Answer
Repurchase shares
Correct Answer
Repurchase shares
1 - Which of the following best describes a best efforts underwriting commitment?
Correct Answer
Underwriter commits to selling as much of the issue as possible at the agreed-on offering price but can return any unsold shares to the issuer without financial responsibility.
Explanation
In a best efforts underwriting commitment, the underwriter is allowed to return unsold shares to issuer.
2
Free Cash Flow | 100 |
Growth rate | 2% |
Tax Rate | 1% |
Cost of Capital | 5% |
Debt-to-total value | 50% |
Given the data in the above table, what is the terminal value of the business (using the growing perpetuity formula)?
Your Answer
3400
Correct Answer
3400
Explanation
Terminal Value = [Free Cash Flow X (1+growth)]/[(Cost of capital – growth)]
PV = [100 X (1+0.02)]/[0.05-0.02] = 3400
3
Cash | 100,000 |
Debt | 60,000 |
Tax Rate | 10% |
Discount Rate | 6% |
Enterprise Value | 500,000 |
Perpetual Growth Rate | 4% |
Given the data in the above table, calculate market capitalization of this hypothetical company.
Your Answer
$540,000
Correct Answer
$540,000
Explanation
Market capitalization = Enterprise value + Cash – Debt
Market capitalization = 500,000 + 100,000 - 60,000 = 540,000
4
Cost of Equity | 5% |
Cost of debt | 7% |
% Debt | 60% |
% Equity | 40% |
Given the data in the above table, what is the weighted average cost of capital of this company?
Your Answer
6.2%
Correct Answer
6.2%
Explanation
The Weighted Average Cost of Capital (WACC) is the proportion of debt and equity a firm has, multiplied by their respective costs.
WACC = (0.6 X 0.07) + (0.4 X 0.05 )= 0.062 = 6.2%
5
Which of the following companies has the lowest degree of leverage?
Your Answer
20% Debt, 80% Equity
Correct Answer
20% Debt, 80% Equity
Explanation
A company with the lowest degree of leverage has the lowest percentage of debt and the highest percentage of equity.
6
Which of the following statements is correct?
Your Answer
Financial buyers are institutions that provide capital and are not operators.
Correct Answer
Financial buyers are institutions that provide capital and are not operators.
Explanation
Financial buyers acquire a business to maximize equity returns but are not involved as operating partners.
7
Which of the following is the correct ordering of the capital stack (from most secure to least secure)?
Your Answer
Senior debt -> Subordinated debt-> Equity
Correct Answer
Senior debt -> Subordinated debt-> Equity
Explanation
Senior debt is the most secure security in the capital stack but also has the lowest return. In the event of bankruptcy, the senior debtholders have first priority in a company’s assets. Subordinated debt follows senior debt. In contrast, equity is the least secure but also has the highest return.
8
Which of the following debt repayment profiles involves a growing principal amount over time?
Your Answer
Pay in kind debt
Correct Answer
Pay in kind debt
Explanation
Pay in kind debt does not involve regular interest payments. All interest payments are accrued throughout the life of the loan and all interest payments, along with the principle, are paid at maturity.
9
Which of the following statements about capital structure are correct? Select ALL correct answers.
Your Answer
A company should always finance its business using as much debt as possible in order to optimize the capital structure.
A company needs to consider the current economic climate when making decisions on debt and equity proportions.
Correct Answer
A company needs to consider the current economic climate when making decisions on debt and equity proportions.
Having too much equity may dilute earnings and the value of the original investors.
Explanation
None.
10
Which of the following is NOT a form of subordinated debt?
Your Answer
Vendor Notes
Correct Answer
Revolver
Explanation
A revolver is a type of senior debt
11
Which of the following best describes a leveraged buyout fund’s acquisitions?
Your Answer
Investing in early stage businesses
Correct Answer
Investing in mature businesses
Explanation
LBO funds typically invest in more mature businesses, usually taking a controlling interest and leveraging the equity investment with a substantial amount of external debt.
12
Which of the following are examples of institutional investors? Select ALL correct answers.
Your Answer
Mutual funds
Correct Answer
Mutual funds
Private equity firms
Explanation
None.
13
Which of the following is not a function of public accounting firms?
Your Answer
Financial Planning & Analysis
Correct Answer
Financial Planning & Analysis
Explanation
FP&A is typically completed by corporate hires for established companies.
14
Which of the following M&A transaction equations is correct?
Your Answer
Value created = Stand-alone value + Net synergies – Consideration (price paid)
Correct Answer
Value created = Stand-alone value + Net synergies – Consideration (price paid)
15
What should a company do if it wants to reduce the number of shares outstanding?
Your Answer
Repurchase shares
Correct Answer
Repurchase shares
Add Answer to:
Which of the following is the correct ordering of the capital stack (from most secure to least secure)?
Which of the following statements about capital structure are correct?
Which of the following statements about capital structure are correct? Select ALL correct answers. A company needs to consider the current economic climate when making decisions on debt and equity proportions. Having too little debt may increase the risk of default repayment. A company should always finance its business using as much debt as possible in order to optimize the capital structure. Having too much equity may dilute earnings and the value of the original investors.
Finance
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