Practice Test

Q1) ....................refers to the mix of a firm’s capitalization and includes long term sources of funds. Show Answer

Q2) The term “capital structure” refers to: Show Answer

Q3) The decisions regarding the forms of financing, their requirements and their relative proportions in total capitalization are known as - Show Answer

Q4) Which of the following statement is false?
I. In case the firm wants to grow at a faster pace, it would be required to incorporate debt in its capital structure to a greater extent.
n. If the firm has no long term debt in its capital structure, it means that either it is risk averse or it has cost of equity capital or cost of retained earnings less than the cost of debt.
Select the correct answer from the options given below.
Show Answer

Q5) While designing a capital structure a finance manager should choose a pattern of capital which Show Answer

Q6) Which of the following changes in capital structure would you recommend for growth at faster rate? Show Answer

Q7) The manner in which an organization’s assets are financed is referred to as its - Show Answer

Q8) Optimal capital structure consists of - Show Answer

Q9) Which of the following is not included in capital structure? Show Answer

Q10) Which of the following shows significance of capital structure? Show Answer

Q11) Financial structure involves creation of -
(1) Long term assets
(2) Short term assets
Select the correct answer from the options given below.
Show Answer

Q12) Which of the following statement is incorrect?(1) High debt funds in capital structure increases EPS.
(2) High debt funds increases the operating or business risk.
Select the correct answer from the options given below
Show Answer

Q13) Financial structure is .................. concept while capital structure is .................. concept Show Answer

Q14) Assertion (A):
The capital structure should be determined within the debt capacity of the company and this capacity should not be exceeded.
Reason (R):
The debt capacity of a company depends on its ability to generate future cash flows. It should have enough cash to pay creditors’ fixed charges and principal sum.
Select the correct answer from the options given below
Show Answer

Q15) Which of the following capital structure consist of zero debt components in the structure mix? Show Answer

Q16) Which of the following statement is false? Show Answer

Q17) One can get a reasonably accurate broad idea about the risk profile of the firm from its - Show Answer

Q18) A critical assumption of the net operating income (NOI) approach to valuation is that: Show Answer

Q19) If the debt component in the capital structure is predominant - Show Answer

Q20) Capital structure relates to .................. capital deployment for creation of .................. assets Show Answer

Q21) Assertion (A):
The capital structure acts as a tax management tool also. Reason (R):
Relatively lesser component of equity capital is vulnerable to hostile takeovers.
Select the correct answer from the options given below
Show Answer

Q22) Select which of the following statement is correct. Horizontal capital structure -
1. is quite stable.
2. is formed by a small amount of equity share capital.
3. there is absence of debt.
4. have increasing component of debt.
Select the correct answer from the options given below.
Show Answer

Q23) One can design capital structure with proper proportions of equity, preference and debt mix. The choice of the combination of these sources is called - Show Answer

Q24) In horizontal capital structure - Show Answer

Q25) In horizontal capital structure - Show Answer

Q26) According to Cost Principle an ideal pattern or capital structure is one that - Show Answer

Q27) In a .................. , the base of the structure is formed by a small amount of equity share capital. This base serves as the foundation on which the super structure of preference share capital and debt is built. Show Answer

Q28) According to Risk Principle - Show Answer

Q29) Use of more and more debt and preference capital - Show Answer

Q30) Business Risk is - Show Answer

Q31) Which of the following statement is true in relation to vertical capital structure? Show Answer

Q32) The rate of tax affects the - Show Answer

Q33) A pyramid shaped capital structure has - Show Answer

Q34) Assertion A:
While making a choice of the capital structure the future cash flow position should be kept in mind.
Reason R:
Debt capital should be used only if the cash flow position is really good because a lot of cash is needed in order to make payment of interest and refund of capital.
Select the correct answer from the options given below:
Show Answer

Q35) To have optimal capital structure the firm must
fulfil the following conditions:
I. Return on investment should be greater than cost of investment.
II. There should be minimum financial risk.
III. There is absence of equity finance.
IV. The capital structure should be flexible
V. Cost of investment should be greater than ROI.
Select correct answer from the options given below.
Show Answer

Q36) Business risk is influenced by - Show Answer

Q37) Capital Structure of a firm - Show Answer

Q38) With the help of Interest Coverage Ratio (ICR) ratio
an effort is made to find out -
Show Answer

Q39) Pyramid Shaped Capital Structure - Show Answer

Q40) Financial Risk is - Show Answer

Q41) Inverted Pyramid Shaped Capital Structure - Show Answer

Q42) Which of the following statement is true?
(i) Flexibility principle states that the management chooses such a combination of sources of financing which it finds easier to adj ust according to changes in need of funds in future too.
(ii) Penalty for not meeting financial obligations is bankruptcy.
(iii) Firms with high business risk therefore tend toward less highly leveraged capital structures, and firm with low business risk tend toward more highly leveraged capital structures.
Select correct answer from the options given below.
Show Answer

Q43) Which of the following is vulnerable to hostile takeovers? Show Answer

Q44) Floatation costs are those expenses which are incurred while - Show Answer

Q45) Operating/Business Risk refers to the risk of - Show Answer

Q46) Which of the following is floatation cost? Show Answer

Q47) ................................denotes the level of EBIT for which the firm’s EPS equals zero. Show Answer

Q48) Which of the following is correct formula to calculate EPS? Show Answer

Q49) If the EBIT is less than the financial breakeven point, then the EPS will be - Show Answer

Q50) According to Net Income Approach, capital structure decision - Show Answer

Q51) According to Net Operating Income Approach - Show Answer

Q52) According to .................. , the firm can increase its total value by decreasing its overall cost of capital through increasing the degree of leverage. Show Answer

Q53) As per Net Income Approach the value of the firm will be maximum at a point where - Show Answer

Q54) Any change in the leverage will not lead to any change in the total value of the firm and the market price of shares, as the overall cost of capital is independent of the degree of leverage. This is as per - Show Answer

Q55) Inability to pay fixed financial payments e.g. payment of interest, preference dividend, return of the debt capital, etc. is called as - Show Answer

Q56) If expected level of EBIT is more than the breakeven point, then the EPS will be - Show Answer

Q57) The overall cost of capital under Net Income Approach is - Show Answer

Q58) Which formula would you use to calculate market value of equity? Show Answer

Q59) Which of the following proposition is made by Modigliani and Miller? Show Answer

Q60) Which of the following assumption is valid as per MM Approach?
1. There is imperfect competition in the market.
2. There is no transaction cost.
3. All investors are rational.
4. All information is not freely available.
Select the correct answer from the options given below.
Show Answer

Q61) According Modigliani & Miller Approach - Show Answer

Q62) A situation where a firm has more capital than it needs is called as - Show Answer

Q63) Which of the following is one of the causes of over capitalization? Show Answer

Q64) Which of the following is one of the causes of over capitalization? Show Answer

Q65) The pecking order theory is popularized by - Show Answer

Q66) Financing comes from three sources, internal funds, debt and new equity. Companies prioritize their sources of financing, first preferring internal financing, and then debt, lastly raising equity as a “last resort”. Hence, internal financing is used first; when that is depleted, then debt is issued; and when it is no longer sensible to issue any more debt, equity is issued. This is as per - Show Answer

Q67) Finance function comprises - Show Answer

Q68) Finance functions includes - Show Answer

Q69) Earning Yield computed by Show Answer

Q70) Assertion (A):
High capital gearing leads to greater speculation. Reason (R):
Proportion of equity share capital in relation to the total capital comprising the other securities is small leading to capitalization being highly geared.
Show Answer

Q71) Which is external source of finance? Show Answer

Q72) Operating income of A Ltd. is Rs.5,00,000. The firms cost of debt is 10% and currently firm employs Rs.15,00,000
of debt. The overall cost of capital of the firm is 15%. You are required to determine ‘total value of the firm’ and ‘market value of equity’ using Net Operating Income Approach (NOI). Ignore taxation.
Show Answer

Q73) Sun Ltd. has 12% debt of Rs.30,00,000. It earns 24% before interest and tax on its total assets of Rs.50,00,000. Tax rate is 40% and capitalization rate is 18%. Calculate the value of the company using Net Income Approach. Show Answer

Q74) Moon Ltd. earns 24% before interest and tax on its total assets of Rs.50,00,000. It is unlevered company and has no debts in its capital structure. Tax rate is 40% and capitalization rate is 18%. Calculate the value of the company using Net Income Approach. Show Answer

Q75) Sun Ltd. has 12% debt of Rs.30,00,000. It earns 24% before interest and tax on its total assets of Rs.50,00,000. Tax rate is 40% and capitalization rate is 18%. Calculate the value of the company using Net Operating Income Approach. Show Answer

Q76) Moon Ltd. earns 24% before interest and tax on its total assets of Rs.50,00,000. It is unlevered company and has no debts in its capital structure. Tax rate is 40% and capitalization rate is 18%. Calculate the value of the company using Net Operating Income Approach. Show Answer

Q77) Merry Ltd. has EBIT of Rs.30,00,000 and 40% tax rate. It required rate of return on equity in the absence of borrowing is 18%. In the absence of personal taxes, what is the ‘total value of the company’ and ‘value of equity’ in an MM world with Rs.40,00,000 in debt. Show Answer

Q78) X Ltd. has EBIT of Rs.30,00,000 and 40% tax rate. It required rate of return on equity in the absence of borrowing is 18%. In the absence of personal taxes, what is the ‘total value of the company' and ‘value of equity’ in an MM world with Rs.70,00,000 in debt. Show Answer

Q79) Financing alternatives for obtaining the requisite amount of Rs.20 Crores are under consideration.
It was decided to issue equity shares of Rs.10 par at a premium of Rs.40 each. Share issue expenses as also under pricing of the issue in comparison to ruling market price result in net proceeds of Rs.40 for every new share issued. How many equity shares are required to be issued for availing finance of Rs.20 Crore?
Show Answer

Q80) . Financing alternatives for obtaining the requisite amount of Rs.20 Crores are under consideration.
Alternative I: Equity shares can be issued at Rs.10 par with a premium of Rs.40 each. Share issue expenses as also under pricing of the issue in comparison to ruling market price result in net proceeds of Rs.40 for every new share issued.
A Itemative //'Company can borrow the requisite amount at 15% rate of interest per year.
The company decided to borrow Rs.10 Crore at 15% rate of interest per year and the balance amount obtained by share issue at par terms indicated in the first alternative.
How many equity shares are required to be issued for availing finance of Rs.20 Crore?
Show Answer

Q81) A company needs Rs.31,25,000 for the construction of new plant. The following two plans are feasible:
(i) Company may issue 3,12,500 equity shares at Rs.10 per share.
(it) Company may issue 1,56,250 ordinary equity shares at Rs.10 per share and 15,625 debentures of Rs.100 denomination bearing a 8% rate of interest.
Corporate income-tax rate is 40%.
Calculate indifference point.
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Q82) A company needs Rs.31,25,000 for the construction of new plant. The following two plans are feasible:
(i) Company may issue 3,12,500 equity shares at Rs.10 per share.
(it) Company may issue 1,56,250 equity shares at Rs.10 per share and 15,625 preference shares at Rs.100 per share bearing a 8% rate of dividend.
Corporate income-tax rate is 40%.
At indifferent point EPS under both plans will be -
Show Answer

Q83) M Ltd. requires Rs.25,00,000 for a new plant. This plant is expected to yield EBIT of Rs.5,00,000. The company considers the objectives of maximizing EPS. It has 3 options to finance the project - by raising debt of Rs.2,50,000 or Rs.10,00,000 or Rs.15,00,000 and the balance, in each case, by issuing equity shares. Company’s shares is currently selling at Rs.150, but it is expected to decline to Rs.125 in case the funds are borrowed in excess of Rs.10,00,000. The funds can be borrowed at the rate of 10% up to Rs.2,50,000 and 15% up to Rs.10,00,000 and at 20% over Rs.10,00,000. The tax rate is 50%. Which form of financing should company choose? Show Answer

Q84) Domino is an all-equity firm with a current cost of equity of 18%. The EBIT of the firm is Rs.2,04,000 annually forever. Currently, the firm has no debt but is in the process of borrowing Rs.5,00,000 at 9% interest. The tax rate is 34%. What is the value of the unlevered firmRs. Show Answer

Q85) There are two firms P and Q which are identical except P does not use any debt in its capital structure while Q has Rs.8,00,000, 9% debentures in its capital structure. Both the firms have EBIT of Rs.2,60,000 p.a. and the capitalization rate is 10%. Corporate tax is 30%. Calculate the total market value of these firms according to MM Hypothesis. Show Answer

Q86) B Ltd. requires Rs.12 lakh to finance its activities. Its earnings before interest and tax amount to Rs.2 lakh. The Finance Manager has forwarded three proposals:
Proposal I II III
Equity Capital 10,00,000 6,00,000 2,00,000
Debt 2,00,000 6,00,000 10,00,000
Interest slab applicable to loan is as under:
Loan up to Rs.2,50,000 10% p.a.
Loan from Rs.2,50,001 to Rs.6,25,000 14% p.a.
Loan from Rs.6,25,001 to Rs.10,00,000 16% p.a.
Tax rate 50%
The market price of a share of the company is Rs.40 which is expected to come down to Rs.25 a share, if the market borrowings exceeds Rs.7,50,000.
Which proposal is most profitable proposal from shareholders point view?
Show Answer

Q87) Skyline Software Ltd. wants to implement a project for which Rs.30 lakhs is required. Following financing options are at hand:
Option 1:
Equity Shares 30,000
Option 2:
Equity Shares 10,000
12% Preference Shares 10,000 10% Debentures 10,000
Calculate the indifference point & EPS at that level of EBIT assuming corporate tax to be 35%.
Show Answer

Q88) Alpha Ltd. is contemplating conversion of 500 14% convertible bonds of Rs.1,000 each. Market price of the bond is Rs.1,080. Bond indenture provided that 1
bond will be exchanged for 10 shares. P/E ratio before redemption is 20:1 and anticipating price earnings ratio after redemption is 25:1. Number of shares outstanding prior to redemption are 10,000. EBIT amounts to Rs.2,00,000. The company is in the 35% tax bracket.
Calculate market price - (i) Pre-redemption and (ii) Post redemption.
Show Answer

Q89) Following data is available for Company X:
Total Assets : Rs.15,00,000
10% Debt : Rs.9,00,000
EBIT : 20% of total assets
Tax rate : 50%
Capitalization rate = 15%
Calculate market value of equity using Net Income (NI) approach.
Show Answer

Q90) Following data is available for Company X:
Total Assets : Rs.15,00,000
10% Debt : Rs.9,00,000
EBIT : 20% of total assets
Tax rate : 50%
Capitalization rate = 15%
Calculate market value of equity using Net Income (NI) approach.
Show Answer

Q91) Following data is available for Company Y:
Total Assets : Rs.15,00,000
Debt : Nil
EBIT : 20% of total assets
Tax rate : 50%
Capitalization rate =15%
Calculate market value of equity using Net Income (NI) approach.
Show Answer

Q92) Following data is available for P Ltd.:
Total Assets : Rs.15,00,000
10% Debt : Rs.9,00,000
EBIT : 20% of total assets
Tax rate : 50%
Capitalization rate =15%
Calculate total value of the firm using Net Operating Income (NOI) approach.
Show Answer

Q93) Following data is available for Q Ltd.:
Total Assets : Rs.15,00,000
Debt : Nil
EBIT : 20% of total assets
Tax rate : 50%
Capitalization rate = 15%
Calculate total value of the firm using Net Operating Income (NOI) approach.
Show Answer

Q94) A student studying Financial Management subject is not able to understand when total market value will be the same for Company X and Company Y if both companies have same total assets.
Company X calculates total value under Net Income (NI) approach and Company Y calculates total value under Net Operating Income (NOI) approach. Help him by selecting correct option.
Show Answer

Q95) Trade International is an all-equity firm that has projected earnings before interest and taxes of Rs.4,97,000 forever. The current cost of equity is 16% and the tax rate is 34%. The company is in the process of issuing Rs.1.5 million of bonds at par that carry a 6% annual coupon. What is the levered value of the firmRs. Show Answer

Q96) Bharat Cylinders has 15,000 shares of stock outstanding and no debt, as the original founder of the firm did not approve of debt financing. The new CEO is considering issuing Rs.2,50,000 of debt and using the proceeds to retire 5,000 shares of stock. The interest rate on debt is 7.5%. What is the break-even level of EBIT between these two capital structure options? Show Answer

Q97) What is the market value of common equity under the NOI approach? The firm has an expected net operating income of Rs.5,000 with Rs.4,000 of debt (market value). Assume that the overall capitalization rate is 20%. Show Answer

Q98) Ganesha Ltd. is setting up a project with a capital outlay of Rs.60,00,000. It has two alternatives in financing the project cost.
Alternative (a): 100% equity finance Alternative (b): Debt-equity ratio 2:1
The rate of interest payable on the debts is 18% p.a. Corporate tax rate is 40%. Calculate the indifference point between the two alternative methods of financing.
Show Answer

Q99) One-third of the total market value of X Ltd. consists of loan stock, which has a cost of 10%. Another company, Y Ltd. is identical in every respect to X Ltd., except that its capital structure is all-equity, and its cost of equity is 16%. According to Modigliani and Miller, if we ignored taxation and tax relief on debt capital, what would be the cost of equity of X Ltd.Rs. Show Answer

Q100) IPL Ltd. has EBIT of Rs.1,00,000. The company makes use of debt and equity capital. The firm has 10% debentures of Rs.5,00,000 and the firm’s equity capitalization rate is 15%. You are required to compute: (i) Current value of the firm; (ii) Overall cost of capital.
From the following information answer next 4 questions.
Alpha Ltd. & Beta Ltd. are identical except for capital structures. Alpha has 50% debt and 50% equity, whereas Beta has 20% debt and 80% equity. All percentages are in market-value terms. The borrowing rate for both companies is 8% in a no-tax world, and capital markets are assumed to be perfect. Both companies have net operating income of Rs.3,60,000 and the overall capitalization rate of the company, K0 is 18%.
Show Answer

Q101) If you own 2% of the stock of Alpha, what is your return? Show Answer

Q102) What is the implied required rate of return on equity of Alpha Ltd.Rs. Show Answer

Q103) What is the market value of equity of Beta Ltd.Rs. Show Answer

Q104) What is the implied required rate of return on equity of Beta Ltd.Rs.
From the following information answer next 4 questions.
RES Ltd. is an all equity financed company with a market value of Rs.25,00,000 and cost of equity, K, = 21 %. The company wants to buyback equity shares worth Rs.5,00,000 by issuing and raising 15% perpetual debt of the same amount. Rate of tax may be taken as 30%. After the capital restructuring and applying MM Model (with , taxes), you are required to answer next 2 questions:
Show Answer

Q105) What is the EBIT of the unlevered firm? Show Answer

Q106) What is the PAT of levered firm? Show Answer

Q107) What is the value of equity of levered firm? Show Answer

Q108) What is the overall cost of capital of levered firm? Show Answer

Q109) The optimal capital structure for a company is the one which offers a balance between the ideal debt-to-equity ranges thus minimizing the firm’s cost of capital. Show Answer

Q110) .....................is “The mix of a firm’s permanent long term financing represented by debt, preferred stock and common stock equity” Show Answer

Q111) Type of capital structure includes: Show Answer

Q112) In a ....................., the firm has zero debt components in the structure mix Show Answer

Q113) In a vertical capital structure, the base of the structure is formed by a small amount of Show Answer

Q114) A .....................has a large proportion consisting of equity capital and retained earnings which have been ploughed back into the firm over a considerably large period of time. Show Answer

Q115) In .....................there is a small component of equity capital, reasonable level of retained earnings but an ever increasing component of debt. Show Answer

Q116) Which of the following statement is correct ? Show Answer

Q117) ..................... relates to long term capital deployment for creation of long term assets. Show Answer

Q118) .....................involves creation of both long term and short term assets Show Answer

Q119) Which of the following statement is not correct ? Show Answer

Q120) While designing capital structure, which point should be kept in view: Show Answer

Q121) Factors affecting cost of capital includes: Show Answer

Q122) Factors affecting cost of capital does not include: Show Answer

Q123) Which of the following is not the capital structure theories /approach ? Show Answer

Q124) According to .....................approach, there is a relationship between capital structure and the value of the firm and therefore, the firm can affect its value by increasing or decreasing the debt proportion in the overall financial mix. Show Answer

Q125) The Net Income Approach makes the following assumptions: Show Answer

Q126) According to Net Operating Income Approach(NOI Approach), the market value of the firm depends upon the net operating profit or EBIT and the ..................... Show Answer

Q127) According to NOI Approach, the financing mix or the capital structure is ..................... and does not affect the value of the firm Show Answer

Q128) The NOI Approach makes the following assumption: Show Answer

Q129) The .....................to capital structure advocates that there is a right combination of equity and debt in the capital structure, at which the market value of a firm is maximum Show Answer

Q130) As per Traditional approach, debt should exist in the capital structure only up to a specific point, beyond which, any increase in leverage would result in the .....................in value of the firm. Show Answer

Q131) Assumptions under traditional approach are: Show Answer

Q132) As per .....................„ value of a firm depends solely on its future earnings stream, and hence its value is unaffected by its debt/equity mix Show Answer

Q133) The use of EBIT - EPS analysis indicates to management the projected .....................for different financial plans Show Answer

Q134) EBITDA, an acronym for Show Answer

Q135) EBITDA is used to analyze a company’s operating profitability before : Show Answer

Q136) EBITDA is calculated by taking net income and adding .....................
expenses back to it.
Show Answer

Q137) EBITDA can not be used to compare companies against each other and against industry averages. Show Answer

Q138) Type of leverage includes: Show Answer

Q139) .....................may be defined as the company’s ability to use fixed operating costs to magnify the effects of changes in sales on its earnings before interest and taxes. Show Answer

Q140) ..................... represents the relationship between the company’s earnings before interest and taxes (EBIT) or operating profit and the earning available to equity shareholders. Show Answer

Q141) Financial leverage may be . depends upon the use of fixed cost funds. Show Answer

Q142) .....................depends upon fixed cost and variable cost Show Answer

Q143) ............... depends upon the operating profits Show Answer

Q144) .....................is the level of EBIT which covers all fixed financing costs of the company. Show Answer

Q145) Financial BEP is the level of EBIT at which EPS is Show Answer

Q146) Indifference Point is the point at which different sets of debt ratios (percentage of debt to total capital employed in the company)gives the same ..................... Show Answer

Q147) .....................expresses the relationship between the revenue in the account of sales and the taxable income Show Answer

Q148) .....................measures the sensitivity of return in investment of charges in the level of current assets. Show Answer

Q149) The Proportion of .....................in the financial plan of a firm is called leverage Show Answer

Q150) As the financial leverage increases, the breakeven point of the company ...................... Show Answer

Q151) Increase in financial leverage, increases the risk to stockholders. Show Answer

Q152) The term "capital structure" refers to: Show Answer

Q153) The traditional approach towards the valuation of a company assumes: Show Answer

Q154) Two firms that are virtually identical except for their capital structure are selling in the market at different values. According to M&M: Show Answer

Q155) Retained earnings are Show Answer

Q156) Operating leverage analyses the relationship between sales level and EPS. Show Answer

Q157) . Financial leverage depends upon the operating leverage. Show Answer

Q158) Dividend on Preference shares is a factor of operating leverage. Show Answer

Q159) Operating leverage may be defined as Contribution - EPS. Show Answer

Q160) Financial leverage depends upon the fixed financial charges. Show Answer

Q161) Combined leverage establishes the relationship between operating leverage and financial leverage. Show Answer

Q162) Financial leverage is always beneficial to the firm. Show Answer

Q163) Total risk of a firm is determined by the combined effect of operating and financial leverages. Show Answer

Q164) Combined leverage helps in analysing the effect of change in sales level on the EPS of the firm Show Answer

Q165) Operating leverage helps in analysis of: Show Answer

Q166) Which of the following is studied with the help of financial leverageRs. Show Answer

Q167) Combined Leverage is obtained from Operating Leverage and Financial Leverage by their: Show Answer

Q168) High degree of financial leverage means: Show Answer

Q169) Operating leverage arises because of: Show Answer

Q170) Financial Leverage arises because of: Show Answer

Q171) Operating Leverage is calculated as: Show Answer

Q172) Financial Leverage is calculated as: Show Answer

Q173) Which combination is generally good for firms Show Answer

Q174) Combined leverage can be used to measure the relationship between: Show Answer

Q175) Which combination is generally good for firms Show Answer

Q176) Combined leverage can be used to measure the relationship between Show Answer

Q177) Financial Leverage is zero if: Show Answer

Q178) Business risk can be measured by: Show Answer

Q179) Financial Leverage measures relationship between Show Answer

Q180) Use of Preference Share Capital in Capital structure Show Answer

Q181) Which of the following is correct ? Show Answer

Q182) If the fixed cost of production is zero, which one of the following is correct ? Show Answer

Q183) If a firm has no debt, which one is correct ? Show Answer

Q184) If a firm has a Degree of Operating Leverage of 2.8, it means: Show Answer

Q185) Higher Operating Leverage is related to the use of higher: Show Answer

Q186) Higher Financial Leverage is related the use of: Show Answer

Q187) Which of the following is not the source of long term finance Rs. Show Answer

Q188) Trout Ltd. produces a single product that has a contribution margin of 60% per unit and sold 500,000 units last year. Trout has a degree of operating leverage of 1.60 and a degree of financial leverage of 1.20 for the current year. If the sales volume were to increase by 10% this coming year, what would be the expected percentage increase in earnings per share (rounded to the nearest percent) ? Show Answer

Q189) SSC Inc. has the following financial information:
Current liabilities $900,000
Long-term debt $1,300,000
Total liabilities $2,200,000
Preferred shares $3,500,000
Common equity $6,200,000
The long-term debt consists of a single bond issue paying 6% interest annually. These bonds currently yield 7.5% in the market. The current cost of the preferred shares is 8%. The current cost of the common shares is 12%. The company’s tax rate is 40%. What is SCC Inc.’s weighted average cost of capital (rounded to the nearest tenth of a percent)Rs.
Show Answer

Q190) Flower Inc. is issuing preferred shares to raise capital. Each preferred share will be issued with a par value of $200 and a cumulative dividend of $18. The preferred shares will result in after-tax underwriting expenses of $3 per share. What is the cost of issuing the preferred shares ? Show Answer

Q191) The slope of the characteristic line is the estimated Show Answer

Q192) Betas may very substantially across an industry. The decision to use the industry or firm Beta, to estimate the cost of capital depends on Show Answer

Q193) Comparing two otherwise equal firms, the beta of the common stock of a leverage firm is ___ than the beta of the common stock of an unlevered firm. Show Answer

Q194) A firm with high operating leverage has Show Answer

Q195) If a firm has low fixed costs relative to all other firms in the same industry, a large change in sales volume (either up or down) would have : Show Answer

Q196) A firm with high operating leverage is characterized by ___ while one with high financial leverage is characterized by ___. Show Answer

Q197) Which one of the following statements is correct concerning the weighted average cost of capital (WACC) ? Show Answer

Q198) Flotation costs should : Show Answer

Q199) The term 'capital structure' refers to : Show Answer

Q200) An EBIT-EPS indifference analysis chart is used for Show Answer

Q201) EBIT is usually the same thing as : Show Answer

Q202) In the context of operating leverage break-even analysis, if selling price per unit rises and all other variables remain constant, the operating break-even point in units will : Show Answer

Q203) If a firm has a DOL at 5 Q units, this tells us that : Show Answer

Q204) This statics can be used as a quantitative measure of relative "financial risk". Show Answer

Q205) A firm's degree of total leverage (DTL) is equal to its degree of operating leverage ___ its degree of financial leverage (DFL). Show Answer

Q206) The further a firm operates above its operating break-even point, the closer its degree of operating leverage (DOL) measure approaches Show Answer

Q207) Which of the following is an argument for the relevance of dividends ? Show Answer

Q208) Degree of financial leverage can be determined by : Show Answer

Q209) Degree of operating leverage can be determined by : Show Answer

Q210) Calculate operating leverage from the following data of X Ltd:
Interest = Rs 5,000
Sales = Rs 50,000
Sales (in units) = 1000 units
Variable cost = Rs 25,000
Fixed cost = Rs 15,000 Show Answer

Q211) Calculate financial leverage from the following data of Y Ltd:
Interest = Rs 5,000
Sales = Rs 50,000
Sales (in units) = 1000 units
Variable cost = Rs 25,000
Fixed cost = Rs 15,000 Show Answer

Q212) Calculate combined leverage of Z Ltd from the following data :
Interest = Rs 5,000
Sales = Rs 50,000
Sales (in units) = 1000 units
Variable cost = Rs 25,000
Fixed cost = Rs 15,000 Show Answer

Q213) Given -
Contribution = Rs 3,00,000
Operating profit = Rs 1,00,000
Tax rate = 50%
Interest = Rs 50,000
Find operating leverage Show Answer

Q214) Given data of Ram Ltd-
Contribution = Rs 3,00,000
Operating profit = Rs 1,00,000
Tax rate = 50%
Interest = Rs 50,000
Find Financial leverage Show Answer

Q215) Given data of Ram Ltd -
Contribution = Rs 3,00,000
Operating profit = Rs 1,00,000
Tax rate = 50%
Interest = Rs 50,000
Find Combined leverage Show Answer

Q216) Calculate operating leverage of XYZ Ltd from the following data :
Sales 2,00,000 units @ 2 rs per unit = Rs 4,00,000
Variable cost per unit @ RS 0.70 per unit
Fixed cost = Rs 2,00,000
Interest charges on debt capital = Rs 7,336 Show Answer

Q217) Calculate combined leverage of XYZ Ltd from the following data :
Sales 2,00,000 units @ 2 rs per unit = Rs 4,00,000
Variable cost per unit @ RS 0.70 per unit
Fixed cost = Rs 2,00,000
Interest charges on debt capital = Rs 7,336
Show Answer

Q218) What is the formula of operating leverage from the following options ? Show Answer

Q219) If fixed cost increase the degree of operating leverage will also - Show Answer

Q220) Total assets - Current liabilities is = ? Show Answer

Q221) As per the formula, Net worth + Preferred Equity + Long term debt = ? Show Answer

Q222) Find out cost of retained earnings of A Ltd from the information given below -
Dividend per share - Rs 10
Personal income tax rate = 30%
Personal capital gains tax rate = 20%
Corporate tax rate = 50%
Market price per share = Rs 100
Brokerage = 2% Show Answer

Q223) The debt policy of an organisation is significantly influenced by the - Show Answer

Q224) Importance of financial decision making for a firm is - Show Answer

Q225) The cost of capital is the minimum required rate of return on the investment project keeps the present wealth of ___ unchanged. Show Answer

Q226) If selling price per unit is Rs 10 variable costs per unit are Rs 6 and fixed costs areRs 16,000, then BEP is 4000 units. In this case Degree of operating leverage will be higher at 5000 units than the degree of operating leverage at a volume of 6000 units. At 5000 units, the Degree of operating leverage will be ___. Show Answer

Q227) The degree of operating leverage will change at every level of - Show Answer

Q228) Degree of financial leverage can be calculated as - Show Answer

Q229) Assertion (A) : The M.M. Hypothesis assumes that there are no taxes.
Reason (B) : This is dividend model.
Code : Show Answer

Q230) Transaction cost includes : Show Answer

Q231) The equity share holders are the residual claimants of all earnings left after meeting all prior___. Show Answer

Q232) Which of the following formula is given by the Walter for determining the market value of equity share ? Show Answer

Q233) Stock dividend ___ the number of equity share. Show Answer

Q234) A stock dividend implies issue of bonus shares to the existing shareholders of the company by way of capitalisation of ___. Show Answer

Q235) "Every type of reserve is not free to be capitalised". Show Answer

Q236) Development Rebate Reserve and Investment Allowance Reserve in a company are treated as __. Show Answer

Q237) The basic problem of long-term capital planning in a firm can be : Show Answer

Q238) Long-term + short term liabilities = ? Show Answer

Q239) Capital structure + Current liabilities = ? Show Answer

Q240) Given- Long term liabilities Rs 90,000, bank overdraft Rs 2,000 ad Sundry creditors Rs 3000. The financial structure of a firm will be : Show Answer

Q241) Given- Plant Rs 30,000, Machinery Rs 30,000 ad stock Rs 35,000. The Asset structure will be : Show Answer

Q242) Which of the following formula may be used for the calculation of debt to Equity Ratio ? Show Answer

Q243) Debt involves : Show Answer

Q244) The proportion of equity share capital to the capital of the firm is known as gear ratio or : Show Answer

Q245) If the proportion of preference shares and loan capital is high where the capital is to be highly : Show Answer

Q246) Capital gearing signifies the process of maintaining a desired and appropriate ___ ratio in the firm. Show Answer

Q247) Which of the following may be used in calculating the cost of debt capital issued at a discount ? Show Answer

Q248) The explicit cost (in case of cost of debt capital) are measured by the interest rate only adjusted by the : Show Answer

Q249) In case of over - capitalisation -
(I) Market value of shares come down from its face value.
(II) Organisation failed to earn sufficient profits.
Which of the following statements is true ? Show Answer

Q250) Which factor is responsible for over-capitalisation ? Show Answer

Q251) Which of the following is not included under qualities of optimum capital structure ? Show Answer

Q252) Which factors affect the working capital ? Show Answer

Q253) Which of the following may be defined as relative change in profit due to the change in sales ? Show Answer

Q254) Which is not included under type of leverage ? Show Answer

Q255) A ___ degree of leverage implies that a large change in profits occurs due to a relatively small change in sales. Show Answer

Q256) Financial leverage occurs when : Show Answer

Q257) Which leverage refers to the use of fixed cost in the operation of a firm ? Show Answer

Q258) A firm will not have operating leverage if : Show Answer

Q259) If the firm has fixed costs, it would have ___ leverage. Show Answer

Q260) Operating leverage increases with fixed cost. State that this statement is true or false. Show Answer

Q261) Assertion (A) : Operating leverage increases with fixed costs
Reason (R) : A firm will have higher operating leverage if the total cost have higher percentage of fixed costs.
Which of the following statement is correct ? Show Answer

Q262) Which of the following statement is correct ? Show Answer

Q263) Which of the following statements is incorrect ? Show Answer

Q264) Which of the following statements is/are correct ? Show Answer

Q265) Profit fluctuation occuring due to high fixed costs are referred to as Show Answer

Q266) ___ leverage is an important determinant of operating risk. Show Answer

Q267) Which of the following formula is related with degree of operating leverage ? Show Answer

Q268) Calculate EPS when EBIT level of RS 5000. Show Answer

Q269) Calculate EPS when EBIT level of RS 7,500. Show Answer

Q270) Calculate EPS when EBIT level of Rs 10,000. Show Answer

Q271) Calculate EPS when EBIT level of Rs 12,500. Show Answer

Q272) Calculate EPS when EBIT level of Rs 15,000. Show Answer

Q273) Calculate EPS when EBIT level of Rs 5,000. Show Answer

Q274) Calculate EPS when EBIT level of Rs 7,500. Show Answer

Q275) Calculate EPS when EBIT level of Rs 10,000. Show Answer

Q276) Calculate EPS when EBIT level of Rs 12,500. Show Answer

Q277) Calculate EPS when EBIT level of Rs 15,000. Show Answer

Q278) Calculate EPS whenEBIT level of Rs. 5,000. Show Answer

Q279) Calculate EPS when EBIT level of Rs 7,500. Show Answer

Q280) Calculate EPS when EBIT level of Rs 10,000. Show Answer

Q281) Calculate EPS when EBIT level of Rs 12,500. Show Answer

Q282) Calculate EPS when EBIT level of Rs 15,000. Show Answer

Q283) A firm issues debenture worth Rs 1,00,000 and realizes Rs 98,000 after allowing 2% commission to brokers. They carry an interest rate of 10% and are due for maturity at the end of 10th year. The company has 40% tax bracket. Show Answer

Q284) Calculate the cost of 10% preference capital of 10,000 preference shares whose face value is Rs 100. The market price of the share is currently Rs 115. Show Answer

Q285) A limited company issues 8% preference shares which are irredeemable. The face value of share is Rs 100 but they are issued at Rs 105. The floatation cost is Rs 3 per share, calculate case of capital. Show Answer

Q286) Calculate the cost of equity capital for a company whose Risk-free rate = 10%, equity market required return = 18% with a beta of 0.5. Show Answer

Q287) Given, the yield on debt is 10% and the risk premium as 5%, calculate the cost of equity. Show Answer

Q288) A company has issued 5,000 equity shares of Rs 100 each. Its current market price is Rs 95 per share and the current dividend is Rs 4.5 per share. The dividends are expected to grow at the rate of 6%. Compute the cost of equity capital. Show Answer

Q289) A company has currently 10,000 equity shares of Rs 100 each and its earnings are Rs 1,50,000. Its current market price is Rs 112 and the growth rate of EPS is expected to be 5%. Calculate the cost of equity. Show Answer

Q290) Information costs both increase the marginal cost of capital and reduce the internal rate of return on investment projects. Show Answer

Q291) Depreciation expenses involve no direct cash outlay and can be safety ignored in investment-project evaluation. Show Answer

Q292) The marginal cost of capital will be less elastic for larger firms than for smaller firms. Show Answer

Q293) In practice, the component costs of debt and equity are jointly rather than independently determined. Show Answer

Q294) Investments necessary to replace worn-out or damaged equipment tend to have low levels of risk. Show Answer

Q295) Calculate the market value of equity and value of firm. Show Answer

Q296) The overall cost of capital is Show Answer

Q297) The value of the firm is Show Answer

Q298) The overall cost of capital will be Show Answer

Q299) The value of the firm is Show Answer

Q300) The overall cost of equity will be Show Answer

Q301) The assumptions of the MM Hypothesis of capital structure do not include the following : Show Answer

Q302) Which of the following is irrelevant for optimal capital structure ? Show Answer

Q303) Financial structure refer to : Show Answer

Q304) An EBIT-EPS indifference analysis chart is used for Show Answer

Q305) The term capital structure means Show Answer

Q306) The cost of monitoring management is considered to be a/n Show Answer

Q307) The traditional approach towards the valuation of a firm assumes : Show Answer

Q308) Market values are often used in computing the weighted average cost of capital because Show Answer

Q309) A firm's optimal capital structure Show Answer

Q310) Capital structure of a firm influences the Show Answer

Q311) In order to calculate the proportion of equity financing used by the company, the following should be used : Show Answer

Q312) The term capital structure denotes : Show Answer

Q313) Debt Financing is a cheaper source of finance because of : Show Answer

Q314) In order to find out cost of equity capital under CAPM, which of the following is not required : Show Answer

Q315) Tax-rate is relevant and important for calculation of specific cost of capital of : Show Answer

Q316) Advantage of Debt financing is : Show Answer

Q317) Cost of issuing new shares to the public is known as : Show Answer

Q318) Cost of Equity share capital is more than cost of debt because : Show Answer

Q319) Which of the following is not a generally accepted approach for Calculation of Cost of Equity ? Show Answer

Q320) Operating leverage helps in analysis of : Show Answer

Q321) Which of the following is studied with the help of financial leverage ? Show Answer

Q322) Combined leverage is obtained from OL and FL by their : Show Answer

Q323) High degree of financial leverage means : Show Answer

Q324) Operating leverage arises because of : Show Answer

Q325) Financial leverage arises because of : Show Answer

Q326) Operating leverage is calculated as : Show Answer

Q327) Financial Leverage is calculated as : Show Answer

Q328) Which combination is generally good for firms Show Answer

Q329) Combined leverage can be used to measure the relationship between : Show Answer

Q330) FL is zero if : Show Answer

Q331) Business risk can be measured by : Show Answer

Q332) Financial leverage measures relationship between Show Answer

Q333) Use of Preference Share Capital in Capital structure Show Answer

Q334) Relationship between change in sales and change m is measured by : Show Answer

Q335) Operating leverage works when : Show Answer

Q336) Which of the following is correct ? Show Answer

Q337) If the fixed cost of production is zero, which one of the following is correct ? Show Answer

Q338) If a firm has no debt, which one is correct ? Show Answer

Q339) If a company issues new share capital to redeem debentures, then : Show Answer

Q340) If a firm has a DOL of 2.8, it means : Show Answer

Q341) Higher OL is related to the use of higher : Show Answer

Q342) Higher Fl is related the use of : Show Answer

Q343) In order to calculate EPS, Profit after Tax and Preference Dividend is divided by : Show Answer

Q344) Trading on Equity is : Show Answer

Q345) Benefit of 'Trading on Equity' is available only if : Show Answer

Q346) Indifference level of EBIT is one at which : Show Answer

Q347) Financial Break-even level of EBIT is one at which : Show Answer

Q348) Relationship between change in Sales and d Operating Profit is known as : Show Answer

Q349) If a firm has no Preference share capital. Financial Break even level is defined as equal to Show Answer

Q350) At indifference level of EBIT, different capital have : Show Answer

Q351) Which of the following is not a relevant factor m EPS Analysis of capital structure ? Show Answer

Q352) For a constant EBIT, if the debt level is further increased then Show Answer

Q353) Between two capital plans, if expected EBIT is more than indifference level of EBIT, then Show Answer

Q354) Which of the following is true for Net Income Approach ? Show Answer

Q355) In case of Net Income Approach, the cost of equity is : Show Answer

Q356) In case of Net Income Approach, when the debt proportion is increased, the cost of debt : Show Answer

Q357) Which of the following is true of Net Income Approach ? Show Answer

Q358) Net Operating Income Approach, which one of the following is constant ? Show Answer

Q359) NOI Approach advocates that the degree of debt financing is : Show Answer

Q360) 'Judicious use of leverage' is suggested by : Show Answer

Q361) Which one is true for Net Operating Income Approach ? Show Answer

Q362) In the traditional Approach, which one of the following remains constant ? Show Answer

Q363) In MM-Model, irrelevance of capital structure is based on : Show Answer

Q364) That there is no corporate tax is assumed by : Show Answer

Q365) That personal leverage can replace corporate leverage is assumed by : Show Answer

Q366) Which of the following argues that the value of levered firm is higher than that of the unlevered firm ? Show Answer

Q367) In traditional Approach, which one is correct ? Show Answer

Q368) Which of the following assumes constant kd and ke ? Show Answer

Q369) Which of the following is true ? Show Answer

Q370) The traditional approach to value of the firm m that : Show Answer

Q371) 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 : Show Answer

Q372) Which of the following is incorrect for NOI ? Show Answer

Q373) Which of the following are incorrect for value of the firm ? Show Answer

Q374) Which of the following appearing in the balance generates tax advantage and hence affects the c, structure decision ? Show Answer

Q375) Financial structure refers to ___. Show Answer

Q376) The market value of the firm is the result of ___. Show Answer

Q377) ___ is one that maximizes value of business, minimizes overall cost of capital, that is flexible, simple and futuristic, that ensures adequate control on affairs of business by the owners and so on. Show Answer

Q378) ___ refers to make up of a firm's capitalization. Show Answer

Q379) ___ of debt capital is a factor in favor of using more debt capital. Show Answer

Q380) ___ of different sources of capital influence capital structure. Show Answer

Q381) Financial risk perception is an influencing factor of ___. Show Answer

Q382) The risk averse prefers debt instruments, while the risk seekers go for ___. Show Answer

Q383) When capital market is borrowing, firms can take market route to ___. Show Answer

Q384) ___ is the expected cash dividend that is normally paid to shareholders. Show Answer

Q385) The ___ is the proportion of earnings that are paid to common shareholders in the form of a cash dividend. Show Answer