This quiz works best with JavaScript enabled. Home > Corporate Finance > Capital Structure – Quiz 6 🏠 Homepage 📘 Download PDF Books 📕 Premium PDF Books Capital Structure Quiz 6 (20 MCQs) Quiz Instructions Select an option to see the correct answer instantly. 1. According to Modigliani-Miller Proposition III with taxes, what factor affects the cost of equity? A) Dividends. B) Leverage. C) Retained Earnings. D) None of above. Show Answer Correct Answer: B) Leverage. 2. It is the combination of debt, preferred stock and ordinary (common) equity that the firm uses to finance the firm's assets. A) Capital Leverage. B) Cost of Capital. C) Capital Structure. D) None of above. Show Answer Correct Answer: C) Capital Structure. 3. Which of the following statements is correct regarding the MM approach to taxes when the use of debt decreases and the cost of debt is lower than the cost of own capital?..... A) The cost of capital itself increases. B) The cost of debt itself decreases. C) The cost of debt increases. D) The company's cost of capital increases. E) The company's cost of capital decreases. Show Answer Correct Answer: D) The company's cost of capital increases. 4. Even if two firms operate in the same industry, they may prefer different choices of debt-equity ratios. A) True. B) False. Show Answer Correct Answer: A) True. 5. How does the use of leverage impact the risk for equity holders? A) It decreases the risk as it allows for more flexibility in financing. B) It increases the risk as it magnifies both potential returns and losses. C) It does not affect the risk as debt and equity are unrelated. D) It diversifies the risk as it introduces another source of financing. Show Answer Correct Answer: B) It increases the risk as it magnifies both potential returns and losses. 6. An organisation's year end is 30 September. On 1 January 20X6 the organisation took out a loan of $ 100, 000 with annual interest of 12%. The interest is payable in equal instalments on the first day of April, July, October and January in arrears.How much should be charged to the statement of profit or loss (SPL) for the year ended 30 September 20X6, and how much should be accrued on the statement of financial position (SOFP)? A) SPL $ 12, 000; SOFP $ 3, 000. B) SPL $ 9, 000; SOFP $ 3, 000. C) SPL $ 9, 000; SOFP Nil. D) SPL $ 6, 000; SOFP $ 3, 000. Show Answer Correct Answer: B) SPL $ 9, 000; SOFP $ 3, 000. 7. What can funders do to improve capitalization in the nonprofit sector? A) Design grants that honor the dynamics of the organization's core business. B) Provide funding for capacity building and capital planning. C) Be aware of the expenses and risks associated with restricted grants. D) All of the above. Show Answer Correct Answer: D) All of the above. 8. The M&M theorem 2 states that ..... is directly proportional to the company's leverage level A) Cost of debt. B) Cost of equity. C) Leverage. D) Market value. Show Answer Correct Answer: B) Cost of equity. 9. According to M&M Proposition II with taxes, what is the impact of an increase in personal tax rates on the cost of debt? A) Increases. B) Decreases. C) Remains constant. D) None of above. Show Answer Correct Answer: A) Increases. 10. States that firm's trade off the tax benefits of debt financing against problems caused by potential bankruptcy. A) Capital Structure Policy. B) Trade-off Theory of Leverage. C) The Modigliani and Miller Model. D) None of above. Show Answer Correct Answer: B) Trade-off Theory of Leverage. 11. In a Perfect Market, two types of investments that offer the same rate of return must have the same price, which is the definition of ..... A) One Price Law. B) Unity of Investment. C) Internal Rate of Return. D) None of above. Show Answer Correct Answer: A) One Price Law. 12. When Operating risk is high, which option should Vanya, Avani, and Tara choose? A) Equity. B) Debt. C) GDR. D) None. Show Answer Correct Answer: A) Equity. 13. "It deals with the effects of financing decision on the stockholder's return, that is the relationship between firm's operating profit and earnings available to common stockholder" . The following statement is referring to ..... A) Total leverage. B) Financial leverage. C) Operating leverage. D) Market leverage. Show Answer Correct Answer: B) Financial leverage. 14. What is the financial manager's objective in making capital structure decision? A) Target Capital Structure. B) Optimal Capital structure. C) Capital Structure Policy. D) None of above. Show Answer Correct Answer: B) Optimal Capital structure. 15. What is considered an optimal capital structure of a company? A) The capital structure that maximises company value while minimising the cost of capital. B) The capital structure that includes only equity. C) The capital structure that includes only debt. D) The capital structure that provides the highest returns regardless of risk. Show Answer Correct Answer: A) The capital structure that maximises company value while minimising the cost of capital. 16. The capital structure decision varies in different sectors and countries. A) True. B) False. Show Answer Correct Answer: A) True. 17. A firm has a fixed operating cost of P25, 000, a per unit sales price of P5 and a variable per unit of P3. What is its operating breakeven point if it desires net operating income of P10, 000, not zero? A) 12, 500 units. B) 15, 000 units. C) 17, 500 units. D) 25, 000 units. Show Answer Correct Answer: C) 17, 500 units. 18. What is mean by Arbitrage A) Taking advantage of misconcept in market. B) Investing in levered company than unlevered company. C) Investing in unlevered company than levered company. D) None of these. Show Answer Correct Answer: A) Taking advantage of misconcept in market. 19. The Fulcrum Company produces decorative swivel platforms for home televisions.If Fulcrum produces 40 million units, it estimates that it can sell themfor $ 100 each. Variable production costs are $ 65 per unit and fixed productioncosts are $ 1.05 billion. Which of the following statements is most accurate?Holding all else constant, the Fulcrum Company would: A) Generate positive operating income if unit sales were 25 million. B) Have less operating leverage if fixed production costs were 10 percent greater than $ 1.05 billion. C) Generate 20 percent more operating income if unit sales were 5 percentgreater than 40 million. D) None of above. Show Answer Correct Answer: C) Generate 20 percent more operating income if unit sales were 5 percentgreater than 40 million. 20. Suppose a project financed via an issue of debt requires seven annual interest payments of $ 20 million each year. If the tax rate is 35% and the cost of debt is 5%, what is the value of the interest rate tax shield? A) $ 40, 504, 613.78. B) $ 3, 731, 076.98. C) $ 7, 387, 277.22. D) $ 907, 304.05. Show Answer Correct Answer: A) $ 40, 504, 613.78. ← PreviousNext →Related QuizzesCapital Structure Quiz 1Capital Structure Quiz 2Capital Structure Quiz 3Capital Structure Quiz 4Capital Structure Quiz 5Capital Structure Quiz 7Capital Structure Quiz 8Capital Structure Quiz 9Capital Structure Quiz 10Capital Structure Quiz 11 🏠 Back to Homepage 📘 Download PDF Books 📕 Premium PDF Books