This quiz works best with JavaScript enabled. Home > Finance > Corporate Finance > Capital Structure – Quiz 1 🏠 Homepage 📘 Download PDF Books 📕 Premium PDF Books Capital Structure Quiz 1 (30 MCQs) Quiz Instructions Select an option to see the correct answer instantly. 1. "A relative small change in sales will lead to large change in the firm's EBIT" . The following statement is true for ..... A) Financial leverage. B) Total leverage. C) Operating leverage. D) Market leverage. Show Answer Correct Answer: C) Operating leverage. 2. 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. 3. 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. 4. 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. 5. 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. 6. 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. 7. 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) 7.533%. B) 11.350%. C) 10.533%. D) 9.533%. Show Answer Correct Answer: D) 9.533%. 8. The cheapest source of finance is A) Debentures. B) Equity Shares. C) Retained Earnings. D) Preference Shares. Show Answer Correct Answer: C) Retained Earnings. 9. 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. 10. The pecking order theory indicates that firms prefer ..... financing over ..... financing. A) Debt, retained earnings. B) Internal, external. C) Equity, debt. D) External, internal. Show Answer Correct Answer: B) Internal, external. 11. Which of the following was not an assumption for the MM theory A) Symmetry of information. B) No transaction costs. C) No taxes. D) Firm is experiencing losses. Show Answer Correct Answer: D) Firm is experiencing losses. 12. 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. 13. Which of the following assumes constant kd and ke A) Traditional Approach. B) Net Income Approach. C) MM model. D) Net Operating Income Approach. Show Answer Correct Answer: B) Net Income Approach. 14. 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. 15. 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. 16. What do theory of MM say? A) Debts is very important. B) Capital structure is relevant. C) Assets is not important. D) Capital structure is irrelevant. Show Answer Correct Answer: D) Capital structure is irrelevant. 17. 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. 18. 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. 19. The relative proportions of debt, equity, and other securities that a firm has outstanding constitute its ..... A) Capital structure. B) Dividend expense. C) Paid out capital. D) Retained earnings. Show Answer Correct Answer: A) Capital structure. 20. This decision is about the quantum of finance to be raised from various long-term sources. A) Investment decision. B) Capital budgeting decision. C) Dividend decision. D) Financing decision. Show Answer Correct Answer: D) Financing decision. 21. Earning per share (EPS) is earnings divided by ..... A) Number of outstanding share. B) Risk. C) Return. D) Expense. Show Answer Correct Answer: A) Number of outstanding share. 22. The term "capital structure" refers to: A) Long-term debt, preferred stock, and common stock equity. B) Current assets and current liabilities. C) Total assets minus liabilities. D) Shareholders' equity. Show Answer Correct Answer: A) Long-term debt, preferred stock, and common stock equity. 23. When more debt is added to capital structure, which of the following happens? A) Cost of equity decreases. B) Cost of equity increases. C) Cost of equity remains constant. D) None of these. Show Answer Correct Answer: B) Cost of equity increases. 24. Bankruptcy Cost is a cost that includes the following things, except..... A) Bankruptcy processing legal fees. B) Administrative costs of managing bankruptcy. C) Debt payment obligations to creditors. D) None of above. Show Answer Correct Answer: C) Debt payment obligations to creditors. 25. Which of the following does a firm consider in the choice of securities issued? A) The tax consequences of the chosen security. B) The transactions costs of the chosen security. C) Whether the chosen security will have a fair price in the market. D) All of the above are considered. . Show Answer Correct Answer: D) All of the above are considered. . 26. Which one of the following states that the value of a firm is unrelated to the firm's capital structure? A) M&M proposition 1. B) CAPM. C) M&M proposition 2. D) Efficient markets hypothesis. Show Answer Correct Answer: A) M&M proposition 1. 27. What does external mean? A) A source from outside the business. B) A source from within the business. Show Answer Correct Answer: A) A source from outside the business. 28. MM in the theory of capital structure stands for ..... A) Modigliani and Miller. B) Modigliani and Mellar. C) Miller and Mustofa. D) Miller and Modigliani. Show Answer Correct Answer: A) Modigliani and Miller. 29. A firm that does not have trouble meeting its debt obligations is said to be in financial distress. A) True. B) False. Show Answer Correct Answer: B) False. 30. A firm's ..... ratio is the fraction of the firm's total value that corresponds to debt. A) Debt-to-equity. B) Debt-to-value. C) Liability. D) Equity-to-debt. Show Answer Correct Answer: B) Debt-to-value. 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