CAPITAL STRUCTURE
CHAPTER- 8
Review Questions
A. MCQ AND OBJECTIVE TYPE QUESTIONS
1. State whether the following statements are true or false:
(i) Capital structure is the mix of preference and equity share capital.
(ii) Capitalisation, capital structure and financial structure do not mean the same.
(iii) Increased use of debt increases the financial risk of equity shareholders.
(iv) According to M & M theory the total value of firm is static.
(v) According to Net Income approach, a firm cannot increases its value by increasing the proportion of debt in its financing.
[Ans- (i) False, (ii) True, (iii) True, (iv) rue, (v) False].
2. Fill in the blanks:
(i) capital gearing refers to the relationship between equity capital and ________.
(ii) It is better for a company to remain in _________ gear during the period of depression.
(iii) The capital structure of company is made ________ and _________ securities.
(iv) Fixed cost bearing securities should be fixed with equity when the rate earnings is _________ than the rate of ________ of the company.
[Ans- (i) Long-term debt; (ii) Low; (iii) (debt, equity; (iv) more, interest].
3. Select the correct answer:
(i) According to which theory, change in capital structure does not affect the market value of a firm:
(a) Net Income Approach
(b) net Operating Income Approach
(c) Traditional approach
(d) None of the above
(ii) Which of the following factors does not influence the capital structure decision:
(a) Cost of capital
(b) Risk
(c) Corporate tax rate
(d) Composition of fixed assets
(iii) When a firm uses more debt in its capital mix, the financial risk of the firm:
(a) Increases
(b) Decreases
(c) Remains unchanged
(d) None of the above
(v) EPS refers to:
(a) earnings Plan Scheme
(b) Earning Per Share
(c) Earning Profit Scheme
(d) None of the above
(v) EBIT stands for:
(a) Earning before interest but after tax
(b) Earning before Income and tax
(c) Earning before interest and tax
(d) Earning before tax but after interest
[Ans- (i) (b); (ii) (d); (iii) (a); (iv) (b); (v) (c)]
B.SHORT ANSWER TYPE QUESTIONS
1. Define capital structure.
Ans-
2. Differentiate between 'Financial Structure' and 'Capital Structure'.
Ans-
3. Differentiate 'capitalisation' and 'capital structure.
Ans-
4. Write a note on the importance of capital structure.
Ans-
5. What is optimal capital structure ?
Ans-
6. Name various theories of capital structure.
Ans-
7. What are the essentials of a sound capital mix ?
Ans-
8. What is trading on equity ?
Ans-
9. What are the assumptions of MM hypothesis ?
Ans-
10. Write a note on 'arbitrage Process'.
Ans-
11. Discuss any five factors relevant in determining capital structure.
Ans-
12. Write a note on EBIT-EPS analysis.
Ans-
B. ESSAY TYPE QUESTIONS
1. What is meant by capital structure ? What are the major determinants of capital structure.
Ans-
2. What do you understand by capital structure ? What are the major determinants of capital structure ?
Ans-
3. Define capital structure. What should generally be the features of an appropriate capital structure ?
Ans-
4. Explain the meaning of the term capital structure and mention the factors affecting capital structure.
Ans-
5. Give a critical appraisal of the traditional approach and the Modigliani- Millers approach to the problem of capital structure.
Ans-
6. Briefly discuss theories of capital structure.
Ans-
7. Discuss the MM approach of capital structure with and without corporate taxes assumptions.
Ans-
8. Using Imaginary figures show how to determine the value of firm under (a) The Net-Income (NI) Approach, and (b) the Net operating Income (NOI) Approach.
Ans-
9. Explain Net Income and Net Operating Income approaches to capital structure.
Ans-
10. Discuss briefly the MM approach to the problem of capital structure. What are its limitations ?
Ans-
Questions Type By- Janmoni Hazarika
Post ID: DABP002240
