This quiz works best with JavaScript enabled. Home > Finance > Corporate Finance > Capital Structure – Quiz 5 🏠 Homepage 📘 Download PDF Books 📕 Premium PDF Books Capital Structure Quiz 5 (30 MCQs) Quiz Instructions Select an option to see the correct answer instantly. 1. 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. 2. 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:$ 250, 000. B) Ordinary share capital:$ 2, 12, 500 Share premium account:$ 2, 62, 500. C) Ordinary share capital:$ 450, 000 Share premium account:$ 25, 000. D) Ordinary share capital:$ 225, 000 Share premium account:$ 325, 000. Show Answer Correct Answer: A) Ordinary share capital:$ 225, 000 Share premium account:$ 250, 000. 3. Price earnings ratio = ..... A) Earnings per share / Market Price per share. B) Market Price per share / Earnings 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: B) Market Price per share / Earnings per share. 4. The value of a firm is maximized when the: A) Weighted average cost of capital is minimized. B) Cost of equity is maximized. C) Levered cost of capital is maximized. D) Tax rate equals the cost of capital. Show Answer Correct Answer: A) Weighted average cost of capital is minimized. 5. 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. 6. '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. 7. 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. 8. 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. 9. 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. 10. 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. 11. 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) 17.755%. B) 18.755%. C) 16.755%. D) 15.755%. Show Answer Correct Answer: D) 15.755%. 12. EBIT is usually the same thing as ..... A) Earnings before taxes. B) Funds provided by operations. C) Net income. D) Operating profit. Show Answer Correct Answer: D) Operating profit. 13. 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. 14. The Modigliani Miller theorem, or the MM theory, is known for ..... A) Working Capital. B) Profits. C) Operations. D) Capital structure. Show Answer Correct Answer: D) Capital structure. 15. 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. 16. Firm with high cash flow volatility should have less debt. A) Yes. B) No. Show Answer Correct Answer: A) Yes. 17. 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. 18. Higher financial leverage causes ..... to increase more for a given increase in ..... A) EPS; Sales. B) EBIT; EPS. C) EBIT; Sales. D) EPS; EBIT. Show Answer Correct Answer: D) EPS; EBIT. 19. 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) $ 20, 961, 727.69. B) $ 10, 285, 296.54. C) $ 41, 066, 206.72. D) $ 1, 753, 195.18. Show Answer Correct Answer: A) $ 20, 961, 727.69. 20. Refers to investor-supplied funds, debt, preferred shares, ordinary equity and retained earnings. A) Investment. B) Capital. C) Leverage. D) None of above. Show Answer Correct Answer: B) Capital. 21. Choose the CORRECT statement A) Financial leverage is acquired by choice to increase the profit. B) Financial leverage concerns with the use of fixed costs by the firm for production. C) Degree of total leverage measures the sensitivity of earnings per share to the change in sales. D) Operating leverage concerns with the use of fixed financing costs by the firm. Show Answer Correct Answer: C) Degree of total leverage measures the sensitivity of earnings per share to the change in sales. 22. The inability of a business to meet its fixed financial obligations, like payment of interest, is known as A) Market risk. B) Business risk. C) Long-term risk. D) Financial risk. Show Answer Correct Answer: D) Financial risk. 23. The traditional approach towards the valuation of a company assumes ..... A) That the overall capitalization rate holds constant with changes in financial leverage. B) That there is an optimum capital structure. C) That total risk is not altered by changes in the capital structure. D) That markets are perfect. Show Answer Correct Answer: B) That there is an optimum capital structure. 24. In Q.2 of test which company is more levered i.e has more risk A) N Ltd. B) M Ltd. C) Both. D) None of these. Show Answer Correct Answer: B) M Ltd. 25. How does the cost of debt impact the capital structure of a company, Aarush, Aashi, and Mira? A) The cost of debt impacts the capital structure of a company by increasing the overall debt level and potentially increasing the financial risk. B) The cost of debt increases the equity level of a company. C) The cost of debt decreases the overall debt level of a company. D) The cost of debt has no impact on the capital structure of a company. Show Answer Correct Answer: A) The cost of debt impacts the capital structure of a company by increasing the overall debt level and potentially increasing the financial risk. 26. Which of the following can't be a Capital Structure? A) Equity only. B) Equity + Debentures. C) Equity + Preference. D) Preference Shares only. Show Answer Correct Answer: D) Preference Shares only. 27. A firm has a current capital structure consisting of P400, 000 of 12% annual interest debt and 50, 000 shares of common stock. The firms tax rate is 40% on ordinary income. lf the EBIT is expected to be P200, 000, the firms earings per share will be A) 2.40. B) 3.04. C) 7.04. D) 1.82. Show Answer Correct Answer: D) 1.82. 28. The interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost is called the internal rate of return. A) TRUE. B) FALSE. Show Answer Correct Answer: A) TRUE. 29. If cashflow position of company is good, which option should Nikita, Akhil, and Kavya choose? A) Equity. B) Retained Earnings. C) Debt. D) All of these. Show Answer Correct Answer: C) Debt. 30. Degree of operating leverage is percent change in sales divided by percent change in EBIT A) True. B) False. Show Answer Correct Answer: B) False. ← PreviousNext →Related QuizzesFinance QuizzesCapital Structure Quiz 1Capital Structure Quiz 2Capital Structure Quiz 3Capital Structure Quiz 4Capital Structure Quiz 6Capital Structure Quiz 7Capital Structure Quiz 8Capital Structure Quiz 9Capital Structure Quiz 10 🏠 Back to Homepage 📘 Download PDF Books 📕 Premium PDF Books