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

Which of the following is irrelevant for optimal capital structure?

Flexibility

Solvency

Liquidity

Control

Q. 3

Financial Structure refers to:

All financial resources

Short-term funds

Long-term funds

None of these

Q. 4

An EBIT-EPS indifference analysis chart is used for:

Evaluating the effects of business risk on EPS

Examining EPS results for alternative financial plans at varying EBIT levels

Determining the impact of a change in sales on EBIT

Showing the changes in EPS quality over time

Q. 5

The term "capital structure" means:

Long-term debt, preferred stock, and equity shares

Current assets and current liabilities

Net working capital

Shareholder’s equity

Q. 6

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

Bankruptcy cost

Transaction cost

Agency cost

Institutional cost

Q. 7

The traditional approach towards the valuation of a firm assumes:

That the overall capitalization rate changes in financial leverage.

That there is an optimum capital structure.

That the total risk is not changed with the changes in the capital structure.

That the markets are perfect

Q. 8

Market values are often used in computing the weighted average cost of capital because:

This is the simplest way to do the calculation.

This is consistent with the goal of maximizing shareholder value.

This is required by SEBI.

This is a very common mistake

Q. 9

A firm's optimal capital structure:

Is the debt-equity ratio that results in the minimum possible weightedaverage 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. 10

Capital structure of a firm influences the:

Risk

Return

Both Risk and Return

Return but not Risk

Q. 11

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

The shares of the company should be split up. This will reduce dividendper share, though EPS shall remain unchanged.

Issue of Bonus Shares.

Revising upward the par value of shares in exchange of the existingshares held by them.

Reduction in claims of debenture-holders and creditors.

FMSM - 5 FINANCING DECISIONS - CAPITAL STRUCTURE

Marks: 11