Multiple Choice Questions – Capital Structure Decisions
1.In order to calculate EPS, Profit after Tax and Preference
Dividend is divided by:
(a) MP of Equity Shares,(b) Number of Equity Shares,(c) Face Value of Equity Shares, (d) None of the above.
2.Trading on Equity is :
(a) Always beneficial,(b) May be beneficial,(c) Never beneficial,(d) None of the above.
3. Benefit of ‘Trading on Equity’ is available only if:
(a) Rate of Interest < Rate of Return,(b) Rate of Interest > Rate of Return,
(c) Both (a) and (b),(d) None of (d) and (b).
4. Indifference Level of EBIT is one at which:
(a) EPS is zero,(b) EPS is Minimum,(c) EPS is highest, (d) None of these.
5. Financial Break-even level of EBIT is one at which:
(a)EPS is one,(b)EPS is zero,(c)EPS is Infinite,(d)EPS is Negative.
6. Relationship between change in Sales and d Operating
Profit is known as:
(a) Financial Leverage,(b) Operating Leverage,(c) Net Profit Ratio,(d) Gross Profit Ratio.
7. If a firm has no Preference share capital, Financial Break even level is defined as equal to –
a)EBIT,(b)Interest liability,(c)Equity Dividend,(d) Tax Liability.
8. At Indifference level of EBIT, different capital have:
a) Same EBIT,(b) Same EPS,(c) Same PAT, (d) Same PBT.
9. Which of the following is not a relevant factor in EPS Analysis of capital structure?
(a) Rate of Interest on Debt,(b)Tax Rate,(c) Amount of Preference Share Capital,
(d) Dividend paid last year.
10. For a constant EBIT, if the debt level is further increased then
(a) EPS will always increase,(b) EPS may increase, (c)EPS will never increase,
(d) None of the above.
11. Between two capital plans, if expected EBIT is more than indifference level of EBIT, then
(a) Both plans be rejected, (b)Both plans are good, (c) One is better than other,(d) None of the above.
12. Financial break-even level of EBIT is:
(a) Intercept at Y-axis,(b) Intercept at X-axis,(c) Slope of EBIT-EPS line
(d) None of the above.
[Answers: 1. (b), 2. (b), 3. (a), 4. (d), 5. (b), 6. (b), 7.
(b), 8. (b), 9. (d), 10. (b), 11. (c), 12. (b)]
Multiple Choice Questions – Capital structure Decisions
1. Which of the following is true for Net Income Approach?
(a) Higher Equity is better,(b) Higher Debt is better,(c) Debt Ratio is irrelevant,(d) None of the above.
2. In case of Net Income Approach, the Cost of equity is:
(a) Constant, (b) Increasing,(c)Decreasing, (d)None of the above.
3. In case of Net Income Approach, when the debt proportion is increased, the cost of debt:
(a) Increases, (b) Decreases, (c) Constant, (d) None of the above.
4. Which of the following is true of Net Income Approach?
(a) VF = VE+VD, (b) VE = VF+VD, (c) VD = VF+VE, (d) VF = VE-VE,
5. Net Operating Income Approach, which one of the lowing is constant?
(a) Cost of Equity, (b) Cost of Debt,(c) WACC & kd, (d)Ke and Kd
6. NOI Approach advocates that the degree of debt financing is:
(a) Relevant,(b) May be relevant,(c) Irrelevant,(d) May be irrelevant.
7. ‘Judicious use of leverage’ is suggested by:
(a) Net Income Approach,(b) Net Operating Income Approach,
(c) Traditional Approach,(d) All of the above.
8. Which one is true for Net Operating Income Approach?
(a) VD = VF – VE,(b) VE = VF + VD,(c) VE = VF – VD,(d) VD = VF + VE.
9. In the Traditional Approach, which one of the following remains constant?
(a) Cost of Equity,(b) Cost of Debt,(c) WACC,(d) None of the above.
10. In MM-Model, irrelevance of capital structure is based on:
(a) Cost of Debt and Equity,(b) Arbitrage Process,(c) Decreasing k0, (d) All of the above.
11.’That there is no corporate tax’ is assumed by:
(a) Net Income Approach,(b) Net Operating Income Approach,
(c) Traditional Approach,(d) All of these.
12. ‘That personal leverage can replace corporate leverage’ is assumed by:
(a) Traditional Approach,(b) MM Model,(c) Net Income
Approach,(d) Net Operating Income Approach.
13. Which of the following argues that the value of levered firm is higher than that of the unlevered firm?
(a) Net Income Approach,(b) Net Operating Income Approach,
(c) MM Model with taxes,(d) Both (a) and (c).
14. In Traditional Approach, which one is correct?
(a) ke rises constantly,(b) kd decreases constantly,(c) k0 decreases constantly,(d) None of the above.
15. Which of the following assumes constant kd and ke?
(a) Net Income Approach,(b) Net Operating Income Approach,(c) Traditional Approach,(d) MM Model.
16. Which of the following is true?
(a) Under Traditional Approach, overall cost of capital remains same,(b) Under NI Approach, overall cost of capital remains
same,(c) Under NOI Approach, overall cost of capital remains same,(d) None of the above.
17. The Traditional Approach to Value of the firm m that:
(a)There is no optimal capital structure,(b) Value can be increased by judicious use of leverage(c) Cost of Capital and Capital structure are m dent,(d) Risk of
the firm is independent of capital structure
18. A firm has EBIT of Rs. 50,000. Market value of debt is Rs. 80,000 and overall capitalization rate is 20%. Market value of firm under NOI Approach is:
(a) Rs. 2,50,000,(b) Rs. 1,70,000,(c) Rs. 30,000,(d) Rs. 1,30,000.
19. Which of the following is incorrect for NOI?
(a) k0 is constant,(b) kd is constant, (c) ke is constant,(d) kd & k0 are constant.
20. Which of the following is incorrect for value of the firm?
(a) In the initial preposition, MM Model argues that value is independent of the financing mix.
(b) Total value of levered and unlevered firms is otherwise arbitrage will take place.(c) Total value incorporates borrowings by firm but excludes personal borrowing.
(d) Total value does not change because underlying does not change with financing mix.
21. Which of the following appearing in the balance! generates tax advantage and hence affects the c, structure decision ?
(a) Reserves and Surplus,(b) Long-term debt,(c) Preference Share Capital,(d) Equity Share Capital.
22. In MM Model with taxes, where ‘r’ is the interest rate, ‘D’ is the total debt and ‘t’ is tax rate, then present valued shields would be:
(a) r×D×t, (b) r×D,(c) D×t, (d) (D× r)/(l-t).
[Answers : l(b), 2(a), 3(c), 4(a), 5(c), 6(c), 7(c), 8(c),
9(d) 10(b), 11 (d), 12(b), 13(d), 14(d), 15(a), 16(c),
17(b), 18(b) 19(c),20(d),21(b),22(c)].