This quiz works best with JavaScript enabled. Home > Finance > Corporate Finance > Capital Structure – Quiz 7 🏠 Homepage 📘 Download PDF Books 📕 Premium PDF Books Capital Structure Quiz 7 (30 MCQs) Quiz Instructions Select an option to see the correct answer instantly. 1. One of the capital structure theories is the MM approach. What does MM stand for? A) Modigliani Miler. B) Modigliani Miller. C) Modigliani Miller. D) Modigliani Miller. E) Modigliani Miller. Show Answer Correct Answer: B) Modigliani Miller. 2. What is "Homemade Leverage" ? A) Best defined as an increase in a firm's debt-equity ratio. B) The incurrence of debt by a corporation in order to pay dividends to shareholders. C) The borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage. D) The exclusive use of debt to fund a corporate expansion project. Show Answer Correct Answer: C) The borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage. 3. Any financial benefit derived from the interest tax shield accrues to the A) Shareholders. B) Bondholders. C) Managers. D) All of the above. Show Answer Correct Answer: A) Shareholders. 4. A debt is substituted for equity in the capital structure and debt ratio increases, all of the following statements about the component of cost of capital are true except A) The cost of equity continually increases. B) The cost of debt continually increases. C) The overall cost of capital first decline, reaches a minimum and then rises again. D) The overall cost of capital continually increases. Show Answer Correct Answer: D) The overall cost of capital continually increases. 5. Equity in a firm with debt is called ..... A) Risk-free equity. B) Preferred equity. C) Unlevered equity. D) Levered equity. Show Answer Correct Answer: D) Levered equity. 6. Which Theories say that market value of firm is affected by Capital structure: A) Net Income (NI) Approach & Traditional Approach. B) Net Operating Income(NOI) & Modigliani and Miller (MM) Approach. C) Net Income (NI) Approach and Modigliani and Miller (MM) Approach. D) Net Operating Income(NOI) & Traditional Approach. Show Answer Correct Answer: A) Net Income (NI) Approach & Traditional Approach. 7. When the result of company D/E ratio (Debt to equity ratio) is greater than 1, it indicates: A) A low risk level of company capital structure. B) A low risk level of company cost of capital. C) A high risk level of company cost of capital. D) A high risk level of company capital structure. Show Answer Correct Answer: D) A high risk level of company capital structure. 8. In reality, when external financing is required but the agency costs or financial distress costs of debt are too great, firms' may prefer to issue equity instead. A) True. B) False. Show Answer Correct Answer: A) True. 9. Which of the following is the name of the registered capital on the day of registration of the enterprise? A) All are correct. B) Capital consists of buildings, capital consists of land. C) Capital is material, capital is capital, capital is labor. D) Funds constitute funds form material. Show Answer Correct Answer: D) Funds constitute funds form material. 10. The way to buy back shares is to use the process ..... A) Offers on the Primary Market. B) Dutch Action. C) Initial Public Offering. D) None of above. Show Answer Correct Answer: B) Dutch Action. 11. When the stock market index is rising, a company may issue ..... in order to meet its financial requirements. A) Debentures. B) Bonds. C) Equity shares. D) None of the above. Show Answer Correct Answer: C) Equity shares. 12. There is ..... relation between operational expenditures and debt financing A) Direct. B) Inverse. C) No relation. D) None of above. Show Answer Correct Answer: B) Inverse. 13. The EBIT of ABC ltd is Rs 8, 00, 000. Rate of Interest is 10% and tax is 30%. Total capital employed is Debt 50, 00, 000. Equity-30, 00, 000 ( price per share is RS 10). Calculate EPS A) 2.1. B) 0.93. C) 1.03. D) 21. Show Answer Correct Answer: A) 2.1. 14. The issued share capital of Alpha, a limited liability company, is as follows:$ Ordinary shares of 10c each 1, 000, 0008% Redeemable preference shares of 50c each 500, 000In the year ended 31 October 20X2, the company has paid the preference dividend for the year and an interim dividend of 2c per share on the ordinary shares. A final ordinary dividend of 3c per share was proposed, before the reporting date.What would be recognised for dividends in the equity section of the statement of financial position at 31 October 20X2? A) $ 580, 000. B) $ 90, 000. C) $ 130, 000. D) $ 200, 000. Show Answer Correct Answer: D) $ 200, 000. 15. In this type of Lease the final intention of the Lessor is to transfer and sell of the asset to the Lessee ..... A) Foreign Lease. B) Leveraged Lease. C) Operating Lease. D) Financial Lease. Show Answer Correct Answer: D) Financial Lease. 16. A company will prefer: A) Really, the WACC rate for a company isn't relevant. B) A low WACC rate. C) A high WACC rate. D) None of above. Show Answer Correct Answer: B) A low WACC rate. 17. Trahan Lumber Company hired you to help estimate its cost of capital. You obtained the following data:D1 = $ 1.25; P0 = $ 27.50; g = 5.00% (constant); and F = 6.00%. What is the cost of equity raised by selling new common stock? A) 9.06%. B) 9.44%. C) 10.23%. D) 9.84%. Show Answer Correct Answer: D) 9.84%. 18. What is the one reasons why capital structure change over time? A) Market Actions. B) Company Size. C) Operating Leverage. D) None of above. Show Answer Correct Answer: A) Market Actions. 19. What are the disadvantages of having a high debt-to-equity ratio in capital structure, according to Aanya, Alisha, and Aarav? A) Decreased financial risk, lower interest expenses, ease in obtaining financing, and no impact on credit rating. B) Decreased financial risk, lower interest expenses, ease in obtaining financing, and positive impact on credit rating. C) The disadvantages of having a high debt-to-equity ratio in capital structure include increased financial risk, higher interest expenses, difficulty in obtaining financing, and negative impact on credit rating. D) No disadvantages, high debt-to-equity ratio is always beneficial. Show Answer Correct Answer: C) The disadvantages of having a high debt-to-equity ratio in capital structure include increased financial risk, higher interest expenses, difficulty in obtaining financing, and negative impact on credit rating. 20. The optimal value of debt, occurs when the value of the firm is maximized. The statement above is true or false. A) True. B) False. Show Answer Correct Answer: A) True. 21. According to tradeoff theory, the total value of a levered firm equals the value of the firm without leverage plus the present value of the ....., less the present value of ..... A) Interest tax shield, financial distress cost. B) Financial cost, interest payment. C) Interest payment, financial cost. D) Financial distress cost, interest tax shield. Show Answer Correct Answer: A) Interest tax shield, financial distress cost. 22. The proportion of debt in the overall capital is also called ..... A) Financial Leverage. B) Capital Structure. C) Trading On equity. D) Cost of funds. Show Answer Correct Answer: A) Financial Leverage. 23. A firm requires an investment of $ 80, 000 and borrows $ 20, 000 at 9%. If the return on equity is 15% and the tax rate is 30%, what is the firm's WACC? A) 13.825%. B) 11.825%. C) 14.825%. D) 12.825%. Show Answer Correct Answer: D) 12.825%. 24. Which of the following cannot be registered capital on the day of establishment of the enterprise? A) Building cash products. B) Land use building vehicles. C) Labor. D) All items can be assembled. Show Answer Correct Answer: C) Labor. 25. Value of the firm (V firm) is Value of the debt (V debt) + ..... A) V revenue (value of the revenue). B) V expense (value of the expense). C) V equity (value of the equity). D) V assets (value of the assets). Show Answer Correct Answer: C) V equity (value of the equity). 26. ..... is the owner of the asset in a lease agreement A) Lessor. B) Lessee. C) Service Lease. D) Tenant. Show Answer Correct Answer: A) Lessor. 27. A theory which asserts that there is an optimal capital structure or at least an optimal range of structures for every firm. A) The Traditional Approach. B) The MM Approach. C) The Contemporary Approach. D) None of above. Show Answer Correct Answer: C) The Contemporary Approach. 28. Many factors can affect the future tax savings from interest. Typically, the level of future interest payments varies due to:i. Changes the firm makes in the amount of debt outstanding, ii. Changes in the interest rate on that debt, iii. Changes in the firm's marginal tax rate, and iv. The risk that the firm may default and fail to make an interest payment. A) I, ii, iii. B) I, iii, iv. C) Ii, iii, iv. D) All of the above. Show Answer Correct Answer: D) All of the above. 29. Explain the concept of optimal capital structure to Anika, Siya, and Akhil. 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. 30. According to M&M Proposition II with taxes, what happens to the cost of equity as the debt-equity ratio increases? A) Cost of equity increases. B) Cost of equity decreases. C) Cost of equity remains constant. D) None of above. Show Answer Correct Answer: B) Cost of equity decreases. ← PreviousNext →Related QuizzesFinance QuizzesCapital Structure Quiz 1Capital Structure Quiz 2Capital Structure Quiz 3Capital Structure Quiz 4Capital Structure Quiz 5Capital Structure Quiz 6Capital Structure Quiz 8Capital Structure Quiz 9Capital Structure Quiz 10 🏠 Back to Homepage 📘 Download PDF Books 📕 Premium PDF Books