hitechpathshala

Q. 1

The assumptions of MM hypothesis of capital structure do not include the following:

Capital markets are imperfect

Investors have homogeneous expectations

All firms can be classified into homogeneous risk classes

The dividend-payout ratio is cent percent, and there is no corporate tax

Q. 2

The term "capital structure" means:

Long-term debt, preferred stock, and equityshares

Current assets and current liabilities

Net working capital

Shareholder’s equity

Q. 3

The cost of monitoring managementis considered to be a (an):

Bankruptcy cost

Transaction cost

Agency cost

Institutional cost

Q. 4

The traditional approach towards the valuation of a firm assumes:

That the overallcapitalization rate changesin financial leverage

That there is an optimum capital structure.

That the total risk is not changedwith the changesin the capital structure.

That the markets are perfect.

Q. 5

Market values are often used in computingthe weighted averagecost of capital because:

This is the simplest way to do the calculation.

This is consistent with the goal of maximizing shareholder value.

This is requiredby SEBI.

This is a very common mistake.

Q. 6

A firm's optimalcapital structure:

Is the debt-equity ratio that resultsin the minimum possible weighted average cost of capital

40 percent debt and 60 percent equity

When the debt-equity ratio is 0.50

When Cost of equity is minimum

Q. 7

Capital structure of a firm influences the:

Risk

Return

Both Risk and Return

Return but not Risk

Q. 8

Consider the below mentioned statements:

1. A company is considered to be over-capitalised when its actual capitalisation is lower than the proper capitalisation as warranted by the earning capacity.

2.Both over-capitalisation and under-capitalisation are detrimental to the interests of the society.

State True or False:

1-True, 2-True

1-False, 2-True

1-False, 2-False

1-True, 2-False

Q. 9

A critical assumption of the Net Operating Income (NOI) approach to valuation is:

That debt and equity levels remain unchanged.

That dividends increaseat a constant rate.

That ko remains constant regardless of changes in leverage.

That interestexpense and taxes are includedin the calculation

Q. 10

Which of the following steps may be adopted to avoid the negative consequences of over-capitalisation?

The shares of the companyshould be split up. This will reduce dividend per share, though EPS shall remain unchanged.

Issue of Bonus Shares.

Revising upward the par value of shares in exchangeof the existing shares held by them.

Reduction in claimsof debenture-holders and creditors.

FMSM 5TH CH

Marks: 10