This quiz works best with JavaScript enabled. Home > Finance > Corporate Finance > Capital Structure – Quiz 4 🏠 Homepage 📘 Download PDF Books 📕 Premium PDF Books Capital Structure Quiz 4 (30 MCQs) Quiz Instructions Select an option to see the correct answer instantly. 1. Retained earnings is the cheapest source of funds. A) Yes. B) No. Show Answer Correct Answer: A) Yes. 2. What is leverage? A) Leverage is referred to as a particular technique that is said to use debt instead of fresh equity in the process of purchasing an asset. B) Leverage is used to portray an ideal situation in the case of a capital structure. C) Leverage is the increase in revenue per share for relation. D) The concept of leverage states that till a certain point debt is not considered to be full-fledged liability. Show Answer Correct Answer: A) Leverage is referred to as a particular technique that is said to use debt instead of fresh equity in the process of purchasing an asset. 3. Financial Leverage means A) Increase in total earnings per share in the company. B) Maximising equity. C) Minimising debts. D) The balance between equity and debt. Show Answer Correct Answer: A) Increase in total earnings per share in the company. 4. Which one of the following statements is correct in relation to M&M Proposition II, without taxes? A) The cost of equity remains constant as the debt-equity ratio increases. B) The required return on assets is equal to the weighted average cost of capital. C) The cost of equity is inversely related to the debt-equity ratio. D) Financial risk is unaffected by the debt-equity ratio. Show Answer Correct Answer: B) The required return on assets is equal to the weighted average cost of capital. 5. What is a leveraged recapitalisation? A) It's when a company sells assets to repay its debts. B) It's when a company borrows money to repurchase its own shares. C) Its when a company issues new shares to decrease its debt. D) It's when a company uses its cash reserves to increase its debt. Show Answer Correct Answer: B) It's when a company borrows money to repurchase its own shares. 6. A company's perpetual preferred stock currently sells for $ 92.50 per share, and it pays an $ 8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firm's cost of preferred stock? A) 9.56%. B) 9.10%. C) 8.65%. D) 7.81%. Show Answer Correct Answer: B) 9.10%. 7. Degree of Total Leverage-The percentage change in a firm's (a) resulting from a 1 percent change in (b) A) A-EPSb-EBIT. B) A-EBITb-EPS. C) A-salesb-EPS. D) A-EPSb-sales. Show Answer Correct Answer: D) A-EPSb-sales. 8. Managers can decide on capital structure by using WACC. A) Yes. B) No. Show Answer Correct Answer: A) Yes. 9. A firm has fixed operating cost of P175, 000, total sales revenue of P3, 000, 000 and total variable cost of P2, 250, 000. The firms degree of operating leverage is ..... A) 1.30. B) 4.29. C) 0.77. D) 0.81. Show Answer Correct Answer: A) 1.30. 10. 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. 11. 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. 12. 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 company's cost of capital decreases. B) The cost of capital itself increases. C) The cost of debt increases. D) The company's cost of capital increases. E) The cost of debt itself decreases. Show Answer Correct Answer: D) The company's cost of capital increases. 13. 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. 14. 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. 15. 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 $ 9, 000; SOFP $ 3, 000. B) SPL $ 6, 000; SOFP $ 3, 000. C) SPL $ 9, 000; SOFP Nil. D) SPL $ 12, 000; SOFP $ 3, 000. Show Answer Correct Answer: A) SPL $ 9, 000; SOFP $ 3, 000. 16. 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. 17. 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. 18. 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. 19. 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. 20. 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. 21. 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. 22. "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) Market leverage. D) Operating leverage. Show Answer Correct Answer: B) Financial leverage. 23. 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. 24. What is considered an optimal capital structure of a company? A) The capital structure that provides the highest returns regardless of risk. B) The capital structure that includes only debt. C) The capital structure that includes only equity. D) The capital structure that maximises company value while minimising the cost of capital. Show Answer Correct Answer: D) The capital structure that maximises company value while minimising the cost of capital. 25. The capital structure decision varies in different sectors and countries. A) False. B) True. Show Answer Correct Answer: B) True. 26. 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) 15, 000 units. B) 17, 500 units. C) 12, 500 units. D) 25, 000 units. Show Answer Correct Answer: B) 17, 500 units. 27. 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. 28. 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. 29. 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) $ 7, 387, 277.22. B) $ 3, 731, 076.98. C) $ 907, 304.05. D) $ 40, 504, 613.78. Show Answer Correct Answer: D) $ 40, 504, 613.78. 30. 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) FALSE. B) TRUE. Show Answer Correct Answer: B) TRUE. ← PreviousNext →Related QuizzesFinance QuizzesCapital Structure Quiz 1Capital Structure Quiz 2Capital Structure Quiz 3Capital 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