This quiz works best with JavaScript enabled. Home > Corporate Finance > Capital Structure – Quiz 4 🏠 Homepage 📘 Download PDF Books 📕 Premium PDF Books Capital Structure Quiz 4 (20 MCQs) Quiz Instructions Select an option to see the correct answer instantly. 1. The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation's taxable income. A) TRUE. B) FALSE. Show Answer Correct Answer: B) FALSE. 2. A firm's degree of total leverage (DTL) is equal to its degree of operating leverage its degree of financial leverage (DFL) ..... A) Plus. B) Minus. C) Divided by. D) Multiplied by. Show Answer Correct Answer: D) Multiplied by. 3. Degree of operating leverage is best described as a measure of the sensitivity of: A) Net earnings to changes in sales. B) Fixed operating costs to changes in variable costs. C) Operating earnings to changes in the number of units produced and sold. D) None of above. Show Answer Correct Answer: C) Operating earnings to changes in the number of units produced and sold. 4. Happy Resorts Company currently has 1.2 million common shares of stock outstanding, and the stock has a beta of 2.2. It also has $ 10 million face value of bonds that have five years remaining to maturity and an 8% coupon with semi-annual payments and are priced to yield 13.65%. If Happy issues up to $ 2.5 million of new bonds, the bonds will be priced at par and will have a yield of 13.65%; if it issues bonds beyond $ 2.5 million, the expected yield on the entire issuance will be 16%. Happy has learned that it can issue new common stock at $ 10 a share. The current risk-free rate of interest is 3%, and the expected market return is 10%. Happy's marginal tax rate is 30%. If Happy raises $ 7.5 million of new capital while maintaining the same debt-to-equity ratio, its weighted average cost of capital will be closest to: A) 14.5%. B) 15.5%. C) 16.5%. D) None of above. Show Answer Correct Answer: B) 15.5%. 5. What is the impact of an endowment challenge grant on a nonprofit organization's capital structure? A) It can create imbalances and put pressure on unrestricted cash and program. B) It can increase the organization's assets and liabilities. C) It can decrease the organization's fixed costs. D) It can restrict the organization's program and mission. Show Answer Correct Answer: A) It can create imbalances and put pressure on unrestricted cash and program. 6. The conclusion of Modigliani-Miller's capital structure model with taxes is that A) There is a trade-off between tax savings on debt increased and increased risk of bankruptcy. B) Firm should be financed with all debt. C) Capital structure decisions do not affect the value of a firm . D) None of above. Show Answer Correct Answer: B) Firm should be financed with all debt. 7. In Q.2 If Who have 10 % of shares of levered firm then what is your income A) Rs. 1300. B) Rs. 2000. C) Rs. 1130. D) None of these. Show Answer Correct Answer: A) Rs. 1300. 8. Why might a company opt for a leveraged recapitalisation? A) To increase its debt and decrease its tax benefits. B) To minimise cost of capital through tax shields from debt interest. C) To decrease its share price in the market. D) To increase the number of its outstanding shares. Show Answer Correct Answer: B) To minimise cost of capital through tax shields from debt interest. 9. There is a trade-off between the taxadvantage of debt and the costs of financial distress.This is often called (a)? A) A static trade-off theory. B) I don't know. Show Answer Correct Answer: A) A static trade-off theory. 10. Which of the following argues that the value of levered firm is higher than that of the unlevered firm A) Net Income Approach. B) Net Operating Income Approach. C) MM Model with taxes. D) Both (a) and (c). Show Answer Correct Answer: D) Both (a) and (c). 11. At 30 June 20X2 a company had $ 1m 8% loan notes in issue, interest being paid half-yearly on 30 June and 31 December.On 30 September 20X2 the company redeemed $ 250, 000 of these loan notes at par, paying interest due to that date.On 1 April 20X3 the company issued $ 500, 000 7% loan notes, interest payable half-yearly on 31 March and 30 September.What figure should appear in the company's statement of profit or loss for interest payable in the year ended 30 June 20X3? A) $ 88, 750. B) $ 82, 500. C) $ 65, 000. D) $ 73, 750. Show Answer Correct Answer: D) $ 73, 750. 12. If an investor buys a share but does not receive a dividend on that share even though 2 weeks ago the company announced that it would distribute dividends. So, the investor buys shares in the period ..... A) Ex-Dividend Date. B) Record Date. C) Payment Date. D) None of above. Show Answer Correct Answer: A) Ex-Dividend Date. 13. The Modigliani-Miller theorem is disregarded by economists because A) It's outdated. B) IT's unrealistic and euphoric. C) IT has been conclusively proven wrong. D) All above. Show Answer Correct Answer: B) IT's unrealistic and euphoric. 14. Capital Structure is the composition of short-term financing for company activities in the form of foreign capital (debt) and own capital. A) Correct. B) Salah. Show Answer Correct Answer: B) Salah. 15. The following statements are true regarding operating leverage EXCEPT A) A change in the volume of sales results in an "equal" change in operating profit (or loss). B) Operating leverage will magnify the effects of changes in sales on the firm's earnings before interest and taxes. C) A relative small change in sales will lead to large change in the firm's EBIT. D) Operating leverage concerns with the usage of fixed cost in a firm. Show Answer Correct Answer: A) A change in the volume of sales results in an "equal" change in operating profit (or loss). 16. In general, it is best if postaudits are done by company management, since they understand the actual operating conditions. A) TRUE. B) FALSE. Show Answer Correct Answer: B) FALSE. 17. Explain the concept of optimal capital structure to Sneha, Aisha, and Myra in a fun and engaging way! A) Optimal capital structure refers to the mix of debt and equity financing that maximizes a company's value and minimizes its cost of capital. B) Optimal capital structure refers to the mix of equity and debt financing that minimizes a company's value and maximizes its cost of capital. C) Optimal capital structure refers to the mix of debt and equity financing that has no impact on a company's value or cost of capital. D) Optimal capital structure refers to the mix of debt and equity financing that minimizes a company's value and maximizes its cost of capital. Show Answer Correct Answer: A) Optimal capital structure refers to the mix of debt and equity financing that maximizes a company's value and minimizes its cost of capital. 18. What is the purpose of capital structure in a nonprofit organization? A) To ensure financial viability and support the organization's mission and program. B) To restrict the use of funds and assets. C) To increase the organization's revenue and profit. D) To provide resources for administrative expenses. Show Answer Correct Answer: A) To ensure financial viability and support the organization's mission and program. 19. Overall risk refers to A) Financial risk. B) Business risk. C) Both. D) None. Show Answer Correct Answer: C) Both. 20. If Debt Service Coverage ratio is low, which option should Sneha, Neha, and Eesha choose? A) Equity. B) Debt. C) Public deposit. D) None. Show Answer Correct Answer: A) Equity. ← PreviousNext →Related QuizzesCapital Structure Quiz 1Capital Structure Quiz 2Capital Structure Quiz 3Capital 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