This quiz works best with JavaScript enabled. Home > Corporate Finance > Capital Structure – Quiz 9 🏠 Homepage 📘 Download PDF Books 📕 Premium PDF Books Capital Structure Quiz 9 (20 MCQs) Quiz Instructions Select an option to see the correct answer instantly. 1. Who does EPS refer for? A) Earning Plan Scheme. B) Earning Per Share. C) Earning Profit Scheme. D) Earning Percentage Scheme. Show Answer Correct Answer: B) Earning Per Share. 2. What is DSCR? A) Debenture Service Cover Ratio. B) Debt Service Coverage Ratio. C) Debenture Service Coverage Ratio. D) None. Show Answer Correct Answer: B) Debt Service Coverage Ratio. 3. If in a particular situation, the earnings per share (EPS) falls with the increased use of debt, it indicates that A) The rate of return on investment (Rol) is less than the cost of debt. B) The rate of return on investment is more than the cost of debt. C) The cost of debt is less than the rate of return on investment. D) None of these. Show Answer Correct Answer: A) The rate of return on investment (Rol) is less than the cost of debt. 4. If investors have homogeneous expectations, the market is efficient, and thereare no taxes, no transaction costs, and no bankruptcy costs, Modigliani andMiller's Proposition I states that: A) Bankruptcy risk rises with more leverage. B) Managers cannot change the value of the company by changing the amountof debt. C) Managers cannot increase the value of the company by employing tax-saving strategies. D) None of above. Show Answer Correct Answer: B) Managers cannot change the value of the company by changing the amountof debt. 5. A critical assumption of the net operating income (NOI) approach to valuation is ..... A) That debt and equity levels remain unchanged. B) That dividends increase at a constant rate. C) That ko remains constant regardless of changes in leverage. D) That interest expense and taxes are included in the calculation. Show Answer Correct Answer: C) That ko remains constant regardless of changes in leverage. 6. Which of the following statements about company financial statements is/are correct, according to International Financial Reporting Standards?1. Dividends paid on ordinary shares should be included in the statement of profit or loss and other comprehensive income.2. Dividends paid on redeemable preference shares are treated in the same way as dividends paid on ordinary shares.3. The statement of profit or loss and other comprehensive income shows the gain on revaluation of non-current assets for the period. A) 1, 2 and 3. B) 2 and 3. C) 3 only. D) All three statements are correct. Show Answer Correct Answer: C) 3 only. 7. In Traditional Approach, which one is correct? A) Ke rises constantly. B) Kd decreases constantly. C) K0 decreases constantly. D) None of the above. Show Answer Correct Answer: D) None of the above. 8. Only accounting rate of return ignores the time value of money A) TRUE. B) FALSE. Show Answer Correct Answer: B) FALSE. 9. Which is the cheapest source of financing? A) Retained Earnings. B) Debt. C) Equity. D) Convertible securities. Show Answer Correct Answer: A) Retained Earnings. 10. ROI is 9.65% and interest rate 11%, the company is planning to raise funds through issue of debentures ..... A) They should. B) They shouldn't. Show Answer Correct Answer: B) They shouldn't. 11. Equity in a firm with no debt is called unlevered equity. A) True. B) False. Show Answer Correct Answer: A) True. 12. According to the second Modigliani-Miller theorem (MM II) in a world with no taxes, what happens to the cost of equity as a firm increases its level of debt A) It decreases. B) It remains constant. C) It increases. D) It becomes negative. Show Answer Correct Answer: C) It increases. 13. If Financial plan 1 has debt and equity and other financial plan has only equity then if (Rate of Return = EBIT/Capital employed) indifference point shall when A) Rate of Return > Rate of interest. B) Rate of return = Rate of interest. C) Rate of return < Rate of interest. D) None of these. Show Answer Correct Answer: B) Rate of return = Rate of interest. 14. Wonder Plantation wants to increase their financing of $ 1 million by applying for long-term loan at 15% interest rate. Expected EBIT = $ 800, 000Income tax rate is 35%. Calculate the DFL. A) 1.25. B) 1.00. C) 1.13. D) 1.23. Show Answer Correct Answer: D) 1.23. 15. Operating leverage occurs due to the existing of ..... in the firm A) Variable cost. B) Operating cost. C) Fixed cost. D) EBIT. Show Answer Correct Answer: C) Fixed cost. 16. What are the advantages of having a high debt-to-equity ratio in capital structure, according to Vanya, Aanya, and Aisha? A) Tax advantages and potential for higher returns. B) Limited access to additional capital and higher cost of borrowing. C) Higher interest payments and lower credit rating. D) Increased financial risk and potential for bankruptcy. Show Answer Correct Answer: A) Tax advantages and potential for higher returns. 17. Which of the following appearing in the balance sheet generates tax advantage and hence affects the capital structure decision? A) Reserves and Surplus. B) Long-term debt. C) Preference Share Capital. D) Equity Share Capital. Show Answer Correct Answer: B) Long-term debt. 18. Commonly if a company is classified as a SME (Small and Medium Enterprise), the company must consider: A) A lower return to the equity-holders in comparison with a return that would be expected over a large company. B) The same return to the equity holders that would be expected over a large company. C) The company cost of debt (Kd) because it influence the company cost of equity (Ke). D) A higher return to the equity-holders in comparison with a return that would be expected over a large company. Show Answer Correct Answer: D) A higher return to the equity-holders in comparison with a return that would be expected over a large company. 19. A greater tax rate will affect company cost of debt (Kd) in the sense that: A) The effective cost of debt will be higher. B) The effective cost of debt will be lower. Show Answer Correct Answer: B) The effective cost of debt will be lower. 20. ) "In arbitrage process we earn same income by taking same risk and investing less than before, or we earn more income by investing same as before and taking same risk" Whether the statement is A) True. B) False. C) Partly true partly false. D) None of these. Show Answer Correct Answer: A) True. ← PreviousNext →Related QuizzesCapital Structure Quiz 1Capital Structure Quiz 2Capital Structure Quiz 3Capital Structure Quiz 4Capital Structure Quiz 5Capital Structure Quiz 6Capital Structure Quiz 7Capital Structure Quiz 8Capital Structure Quiz 10Capital Structure Quiz 11 🏠 Back to Homepage 📘 Download PDF Books 📕 Premium PDF Books