This quiz works best with JavaScript enabled. Home > Corporate Finance > Capital Structure – Quiz 1 🏠 Homepage 📘 Download PDF Books 📕 Premium PDF Books Capital Structure Quiz 1 (20 MCQs) Quiz Instructions Select an option to see the correct answer instantly. 1. EBIT stands for A) Earnings Before Interest after Tax. B) Earnings Between Interest and Tax. C) Earnings Before Income and Tax. D) Earnings Before Interest and Tax. Show Answer Correct Answer: D) Earnings Before Interest and Tax. 2. "A relative small change in sales will lead to large change in the firm's EBIT" . The following statement is true for ..... A) Total leverage. B) Financial leverage. C) Operating leverage. D) Market leverage. Show Answer Correct Answer: C) Operating leverage. 3. What are the factors that affect capital structure decisions for Ishika, Siya, and Arnav? A) Interest rates, industry regulations, and company size. B) Employee satisfaction, customer loyalty, and product quality. C) Business risk, tax considerations, financial flexibility, cost of capital, and market conditions. D) Advertising expenses, research and development costs, and competition. Show Answer Correct Answer: C) Business risk, tax considerations, financial flexibility, cost of capital, and market conditions. 4. When firms' capital structure decisions are consistent with the Pecking Order Theory, the reason behind their decision is always caused by information asymmetry. A) True. B) False. Show Answer Correct Answer: B) False. 5. What is the classification of Working Capital based on time: A) Gross and Net. B) Permanent and Temporary. C) Current and Quick. D) None of these. Show Answer Correct Answer: B) Permanent and Temporary. 6. Two firms that are virtually identical except for their capital structure are selling in the market at different values. According to M&M ..... A) One will be at greater risk of bankruptcy. B) The firm with greater financial leverage will have the higher value. C) This proves that markets cannot be efficient. D) This will not continue because arbitrage will eventually cause the firms to sell at the same value. Show Answer Correct Answer: D) This will not continue because arbitrage will eventually cause the firms to sell at the same value. 7. In Q.2 If Who have 10 % of shares of unlevered firm then can you take advantage by arbitrage A) Yes. B) No. C) There is nothing called arbitrage. D) What rubbish. Show Answer Correct Answer: B) No. 8. If the weighting of equity in total capital is 1/3, that of debt is 2/3, the return on equity is 15% that of debt is 10% and the corporate tax rate is 32%, what is the Weighted Average Cost of Capital (WACC)? A) 10.533%. B) 7.533%. C) 9.533%. D) 11.350%. Show Answer Correct Answer: C) 9.533%. 9. The cheapest source of finance is A) Equity Shares. B) Preference Shares. C) Retained Earnings. D) Debentures. Show Answer Correct Answer: C) Retained Earnings. 10. The unleveled cost of capital refers to the cost of capital for a(n) A) All equity firm. B) Private equity. C) Governmental entity. D) Private individual. Show Answer Correct Answer: A) All equity firm. 11. The pecking order theory indicates that firms prefer ..... financing over ..... financing. A) Debt, retained earnings. B) Equity, debt. C) Internal, external. D) External, internal. Show Answer Correct Answer: C) Internal, external. 12. Which of the following was not an assumption for the MM theory A) No transaction costs. B) Symmetry of information. C) No taxes. D) Firm is experiencing losses. Show Answer Correct Answer: D) Firm is experiencing losses. 13. In general terms, a sound capital investment will earn A) Back its original capital outlay. B) Back its original capital outlay by the midpoint of its useful life. C) Back its original capital outlay and provide a reasonable return on the original investment. D) Back its original capital outlay by the midpoint of its useful life. Show Answer Correct Answer: C) Back its original capital outlay and provide a reasonable return on the original investment. 14. Which of the following assumes constant kd and ke A) Net Income Approach. B) Net Operating Income Approach. C) Traditional Approach. D) MM model. Show Answer Correct Answer: A) Net Income Approach. 15. Vega Company has announced that it intends to raise capital next year, butit is unsure as to the appropriate method of raising capital. White, the CFO, has concluded that Vega should apply the pecking order theory to determinethe appropriate method of raising capital. Based on White's conclusion, Vegashould raise capital in the following order: A) Debt, internal financing, equity. B) Equity, debt, internal financing. C) Internal financing, debt, equity. D) None of above. Show Answer Correct Answer: C) Internal financing, debt, equity. 16. It is the equity risk that comes from the nature of the firm's operating activities. A) Investment Risk. B) Business Risk. C) Financial Risk. D) None of above. Show Answer Correct Answer: B) Business Risk. 17. What do theory of MM say? A) Debts is very important. B) Assets is not important. C) Capital structure is irrelevant. D) Capital structure is relevant. Show Answer Correct Answer: C) Capital structure is irrelevant. 18. What does a higher financial leverage ratio indicate? A) The proportion of equity in the total capital is high. B) The dependency of the firm on the debt is less. C) The dependency of the firm on the debt is more. D) None of the above. Show Answer Correct Answer: C) The dependency of the firm on the debt is more. 19. What is capital structure? A) The distribution, nature, and magnitude of an organization's assets, liabilities, and net assets. B) The amount of cash a nonprofit organization has. C) The number of employees in a nonprofit organization. D) The number of programs a nonprofit organization offers. Show Answer Correct Answer: A) The distribution, nature, and magnitude of an organization's assets, liabilities, and net assets. 20. The relative proportions of debt, equity, and other securities that a firm has outstanding constitute its ..... A) Capital structure. B) Dividend expense. C) Retained earnings. D) Paid out capital. Show Answer Correct Answer: A) Capital structure. Next →Related QuizzesCapital Structure Quiz 2Capital Structure Quiz 3Capital Structure Quiz 4Capital Structure Quiz 5Capital Structure Quiz 6Capital Structure Quiz 7Capital Structure Quiz 8Capital Structure Quiz 9Capital Structure Quiz 10Capital Structure Quiz 11 🏠 Back to Homepage 📘 Download PDF Books 📕 Premium PDF Books