Capital Structure: Master the Art of Company Financing

Question 1

Which theory of capital structure suggests that companies prefer using internal funds over debt or equity financing?

Accepted Answer

Pecking order theory

Answer

Net income approach

Answer

Trade-off theory

Question 2

Which factor is irrelevant to a company's capital structure decision?

Accepted Answer

Employee morale

Answer

Cost of debt

Answer

Cost of equity

Answer

Tax rate

Question 3

What is an advantage of debt financing?

Accepted Answer

Tax-deductible interest payments

Answer

Reduced risk of bankruptcy

Answer

Unlimited flexibility

Answer

Higher earnings per share

Question 4

Which of the following is an advantage of debt financing over equity financing?

Accepted Answer

Lower cost of capital due to tax deductibility of interest payments

Answer

Increased flexibility in repaying debt obligations

Answer

Greater control over company operations for existing shareholders

Answer

Increased return on equity for shareholders

Question 5

How does selecting debt over equity financing impact a company's risk level?

Accepted Answer

Debt financing increases financial leverage, elevating risk.

Answer

Equity financing always carries less risk than debt financing.

Answer

Capital structure optimization primarily aims to reduce capital costs.

Question 6

Which of the following is not typically considered a factor that influences capital structure decisions?

Accepted Answer

Availability of government grants

Answer

Firm's size

Answer

Firm's industry

Answer

Firm's growth rate

Question 7

Which of the following is NOT a key factor that firms should consider when making capital structure decisions?

Accepted Answer

Return on equity

Answer

Cost of capital

Answer

Financial risk

Answer

Availability of financing sources

Question 8

What is the weighted average cost of capital (WACC)?

Accepted Answer

The average cost of a firm's multiple sources of financing, weighted by their respective proportions

Answer

The cost of a firm's debt financing only

Answer

The cost of a firm's equity financing only

Answer

The cost of a firm's preferred stock financing only

Question 9

What is the primary concern associated with a high level of debt financing?

Accepted Answer

Increased financial risk

Answer

Reduced flexibility

Answer

Lower growth potential

Answer

Loss of control

Question 10

What is the relationship between interest coverage ratio and debt capacity?

Accepted Answer

A higher interest coverage ratio indicates a higher debt capacity.

Answer

A lower interest coverage ratio indicates a lower debt capacity.

Answer

There is no relationship between interest coverage ratio and debt capacity.

Answer

None of the options provided.

Question 11

What key factors influence a company's optimal capital structure?

Accepted Answer

Tax considerations

Accepted Answer

Industry characteristics

Accepted Answer

Firm size

Answer

Personal preferences of management

Question 12

What is a primary factor in determining a company's ideal capital structure?

Accepted Answer

Debt and equity financing costs

Answer

Retained earnings availability

Answer

Industry of the company

Question 13

Which of the following factors is **most** influential in determining a company's capital structure?

Accepted Answer

Trade-offs between debt and equity financing

Answer

Industry average leverage

Answer

Shareholder risk tolerance

Answer

Government regulations

Question 14

A company with a high debt-to-equity ratio is generally considered to have a:

Accepted Answer

Increased financial risk

Answer

Lower cost of capital

Answer

Improved profitability

Question 15

The weighted average cost of capital (WACC) is calculated as the:

Accepted Answer

[(Cost of debt x Debt ratio) + (Cost of equity x Equity ratio)]

Answer

[(Cost of debt + Cost of equity) / 2]

Answer

[(Debt ratio / Equity ratio) x Cost of capital]

Question 16

Which of the following is a primary advantage of equity financing?

Accepted Answer

No fixed interest payments

Answer

Tax deductibility

Answer

Reduced financial risk

Answer

Lower cost of capital

Question 17

A company's target capital structure is typically based on the:

Accepted Answer

Balance between risk and return

Answer

Adherence to industry norms

Answer

Minimization of tax liability

Answer

Maximization of shareholder wealth

Question 18

The process of adjusting a company's capital structure to its target is known as:

Accepted Answer

Capital restructuring

Answer

Corporate governance

Answer

Risk management

Answer

Financial planning

Question 19

A company with a high degree of financial leverage is more likely to:

Accepted Answer

Experience financial distress in an economic downturn

Answer

See improved shareholder returns

Answer

Experience increased profitability in a growing economy

Answer

Benefit from a lower cost of capital

Question 20

Which of the following is a common measure used to assess financial leverage?

Accepted Answer

Debt-to-equity ratio

Answer

Quick ratio

Answer

Price-to-earnings ratio

Answer

Current ratio