This quiz works best with JavaScript enabled. Home > Corporate Finance > Capital Structure – Quiz 7 🏠 Homepage 📘 Download PDF Books 📕 Premium PDF Books Capital Structure Quiz 7 (20 MCQs) Quiz Instructions Select an option to see the correct answer instantly. 1. Suppose that the actual cost of capital is 10%, but the firm chooses a discount rate of 18%. Managers of that company will be more likely to choose relatively short term investments. A) TRUE. B) FALSE. Show Answer Correct Answer: A) TRUE. 2. In Q.2 If Who have 10 % of shares of levered 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: A) Yes. 3. At 31 December 20X4 a company's capital structure was as follows:$ Ordinary share capital (500, 000 shares of 25c each)125, 000Share premium account100, 000In the year ended 31 December 20X5 the company made a rights issue of one share for two held at $ 1 per share and this was taken up in full.Later in the year the company made a bonus issue of one share for every five held, using the share premium account for the purpose.What was the company's capital structure at 31 December 20X5? A) Ordinary share capital:$ 225, 000 Share premium account:$ 325, 000. B) Ordinary share capital:$ 450, 000 Share premium account:$ 25, 000. C) Ordinary share capital:$ 2, 12, 500 Share premium account:$ 2, 62, 500. D) Ordinary share capital:$ 225, 000 Share premium account:$ 250, 000. Show Answer Correct Answer: D) Ordinary share capital:$ 225, 000 Share premium account:$ 250, 000. 4. Price earnings ratio = ..... A) Market Price per share / Earnings per share. B) Earnings per share / Market Price per share. C) (Market Price per share x No. of shares) / Earnings per share. D) Market Price per share / (Earnings per share x No. of shares). Show Answer Correct Answer: A) Market Price per share / Earnings per share. 5. The value of a firm is maximized when the: A) Cost of equity is maximized. B) Tax rate equals the cost of capital. C) Levered cost of capital is maximized. D) Weighted average cost of capital is minimized. Show Answer Correct Answer: D) Weighted average cost of capital is minimized. 6. The company cost of debt under market value approach can be calculated using: A) The balance or record by financial expenses and total debt. B) The CAPM model. C) The YTM (Yield to Maturity) rate of each bond issued by the company, and the bond value. D) The coupon rate of each bond issued by the company, and the bond value. Show Answer Correct Answer: D) The coupon rate of each bond issued by the company, and the bond value. 7. 'Judicious use of leverage' is suggested by: A) NI approach. B) NOI Approach. C) Traditional Approach. D) All of the above. Show Answer Correct Answer: C) Traditional Approach. 8. What is the relationship between risk and capital structure for Tisha, Rohan, and Asher? A) Risk and capital structure are unrelated. B) As the level of risk increases, the optimal capital structure shifts towards a higher proportion of debt and a lower proportion of equity. C) As the level of risk increases, the optimal capital structure shifts towards a lower proportion of debt and a higher proportion of equity. D) As the level of risk increases, the optimal capital structure remains the same. Show Answer Correct Answer: C) As the level of risk increases, the optimal capital structure shifts towards a lower proportion of debt and a higher proportion of equity. 9. According to Modigliani-Miller Proposition III with taxes, what is the relationship between the cost of equity and the leverage level? A) Cost of Equity Increases with Leverage. B) Cost of Equity Decreases with Leverage. C) Cost of Equity Remains Constant with Leverage. D) None of above. Show Answer Correct Answer: A) Cost of Equity Increases with Leverage. 10. Is the cash a business has for its day-to-day spending. A) Working capital. B) Current assets. C) Current liabilities. D) None of above. Show Answer Correct Answer: A) Working capital. 11. When a company makes a rights issue of equity shares which of the following effects will the issue have?1 Assets are increased2 Retained earnings are reduced3 Share premium account is reduced4 Investments are increased A) 1 only. B) 1 and 2. C) 3 only. D) 1 and 4. Show Answer Correct Answer: A) 1 only. 12. A firm requires an investment of $ 100, 000 and borrows $ 30, 000 at 9%. If the return on equity is 20% and the tax rate is 35%, what is the firm's WACC? A) 15.755%. B) 16.755%. C) 17.755%. D) 18.755%. Show Answer Correct Answer: A) 15.755%. 13. EBIT is usually the same thing as ..... A) Funds provided by operations. B) Earnings before taxes. C) Net income. D) Operating profit. Show Answer Correct Answer: D) Operating profit. 14. A firm is analyzing two possible capital structures, 30%, and 50% debt ratios. The firm has total assets of P5M and common stock valued at P50 per share. The firm has a marginal tax rate of 40% on ordinary income. If the interest rates on debt is 7% and 9% for the 30% and 50% debt ratios respectively, the amount of interest on the debt is under each of the capital structure being considered would be A) 30% debt ratio:P105, 000 and 50% debt ratio P225, 000. B) 30% debt ratio:P245, 000 and 50% debt ratio P225, 000. C) 30% debt ratio:P105, 000 and 50% debt ratio P250, 000. D) 30% debt ratio:P135, 000 and 50% debt ratio P175, 000. Show Answer Correct Answer: A) 30% debt ratio:P105, 000 and 50% debt ratio P225, 000. 15. The Modigliani Miller theorem, or the MM theory, is known for ..... A) Profits. B) Working Capital. C) Capital structure. D) Operations. Show Answer Correct Answer: C) Capital structure. 16. What are receivables in a nonprofit organization? A) Money due to the organization, such as fees or pledges. B) Donations received from individuals or foundations. C) The amount of money a nonprofit organization has in the bank. D) The value of the organization's buildings and equipment. Show Answer Correct Answer: A) Money due to the organization, such as fees or pledges. 17. Firm with high cash flow volatility should have less debt. A) Yes. B) No. Show Answer Correct Answer: A) Yes. 18. The current weighted average cost of capital (WACC) for Van der Welde is10%. The company announced a debt offering that raises the WACC to 13%.The most likely conclusion is that for Van der Welde: A) The company's prospects are improving. B) Equity financing is cheaper than debt financing. C) The company's debt/equity has moved beyond the optimal range. D) None of above. Show Answer Correct Answer: C) The company's debt/equity has moved beyond the optimal range. 19. Higher financial leverage causes ..... to increase more for a given increase in ..... A) EBIT; Sales. B) EPS; Sales. C) EPS; EBIT. D) EBIT; EPS. Show Answer Correct Answer: C) EPS; EBIT. 20. Suppose a project financed via an issue of debt requires five annual interest payments of $ 15 million each year. If the tax rate is 35% and the cost of debt is 8%, what is the value of the interest rate tax shield? A) $ 1, 753, 195.18. B) $ 41, 066, 206.72. C) $ 20, 961, 727.69. D) $ 10, 285, 296.54. Show Answer Correct Answer: C) $ 20, 961, 727.69. ← PreviousNext →Related QuizzesCapital Structure Quiz 1Capital Structure Quiz 2Capital Structure Quiz 3Capital Structure Quiz 4Capital Structure Quiz 5Capital Structure Quiz 6Capital Structure Quiz 8Capital Structure Quiz 9Capital Structure Quiz 10Capital Structure Quiz 11 🏠 Back to Homepage 📘 Download PDF Books 📕 Premium PDF Books