This quiz works best with JavaScript enabled. Home > Finance > Corporate Finance > Capital Structure – Quiz 3 🏠 Homepage 📘 Download PDF Books 📕 Premium PDF Books Capital Structure Quiz 3 (30 MCQs) Quiz Instructions Select an option to see the correct answer instantly. 1. A firm's degree of total leverage (DTL) is equal to its degree of operating leverage its degree of financial leverage (DFL) ..... A) Multiplied by. B) Divided by. C) Plus. D) Minus. Show Answer Correct Answer: A) Multiplied by. 2. 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. 3. 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%. 4. 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. 5. 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. 6. 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. 7. 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. 8. 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. 9. 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). 10. 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) $ 82, 500. B) $ 88, 750. C) $ 65, 000. D) $ 73, 750. Show Answer Correct Answer: D) $ 73, 750. 11. 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. 12. 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. 13. 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. 14. 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). 15. 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. 16. 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. 17. 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. 18. Overall risk refers to A) Financial risk. B) Business risk. C) Both. D) None. Show Answer Correct Answer: C) Both. 19. 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. 20. The ..... the amount of time between buying materials (inputs) to receiving payments from the customer the higher the risk to a firm. A) Longer. B) Shorter. C) Medium. D) None of these. Show Answer Correct Answer: A) Longer. 21. The increase in the use of debt as a source of financing cannot cause A) Reduction in Company Net Income. B) Corporate Tax Reduction. C) Increased Company Risk. D) Peningkatan Expected Return. E) Increase in Company EBT. Show Answer Correct Answer: E) Increase in Company EBT. 22. Dev has two projects A and B in hand. The same amount of risk is involved in both the projects. If the rate of return of project A and B is 20% and 15% respectively, then under normal circumstance, which of the two projects is likely to be selected? A) Project A. B) Project B. C) Both project A and project B. D) None of the above. Show Answer Correct Answer: A) Project A. 23. This is the process of planning expenditures that generate cash flows expected to extend beyond one year. A) Purchasing budgeting. B) Financial budgeting. C) Capital budgeting. D) Operating budgeting. Show Answer Correct Answer: C) Capital budgeting. 24. Earnings per share = ..... A) (Profit after tax + Preference dividend) / Number of Equity shares. B) Number of Equity shares / (Profit after tax-Preference dividend). C) (Profit after tax-Preference dividend) / Number of Equity shares. D) Number of Equity shares / (Profit after tax + Preference dividend). Show Answer Correct Answer: C) (Profit after tax-Preference dividend) / Number of Equity shares. 25. According to Modigliani-Miller Proposition I with taxes, what happens to the cost of capital as the debt-equity ratio increases? A) Increases. B) Decreases. C) It depends. D) None of above. Show Answer Correct Answer: B) Decreases. 26. Higher leverage generally results in higher returns, but also higher risks A) True. B) False. Show Answer Correct Answer: A) True. 27. Financial managers prefer to choose the same debt level no matter which industry they operate in. A) True. B) False. Show Answer Correct Answer: B) False. 28. The formula for finding V (Market Value) of a company is ..... A) Debt + Asset. B) Asset + Equity. C) Debt + Equity. D) None of above. Show Answer Correct Answer: C) Debt + Equity. 29. Investment cash flows are independent of financing choices in a ..... A) Setting with frictions in investment returns. B) Perfect capital market. C) Firm with leverage. D) Market with frictions. Show Answer Correct Answer: B) Perfect capital market. 30. "The market value of a company is calculated using its ..... and the risk of its underlying assets and that its value is ..... of the way it finances investments or distributes dividends" A) Debt-dependent. B) Earning power Dependent. C) Earning power independent. D) Debt independent. Show Answer Correct Answer: C) Earning power independent. ← PreviousNext →Related QuizzesFinance QuizzesCapital Structure Quiz 1Capital Structure Quiz 2Capital Structure Quiz 4Capital Structure Quiz 5Capital Structure Quiz 6Capital Structure Quiz 7Capital Structure Quiz 8Capital Structure Quiz 9Capital Structure Quiz 10 🏠 Back to Homepage 📘 Download PDF Books 📕 Premium PDF Books