CAPITAL STRUCTURE

1. Refers to investor-supplied funds, debt, preferred shares, ordinary equity and retained earnings.

• a. Investment

• b. Capital

• c. Leverage

2. Refers to the use of debt (borrowed funds) to amplify returns from an investment or project.

• a. Investment

• b. Capital

• c. Leverage

3. It is the combination of debt, preferred stock and ordinary (common) equity that the firm uses to finance the firm’s assets.

• a. Capital Leverage

• b. Cost of Capital

• c. Capital Structure

4. What is the financial manager’s objective in making capital structure decision?

• a. Target Capital Structure

• b. Optimal Capital structure

• c. Capital Structure Policy

5. What is the one reasons why capital structure change over time?

• a. Market Actions

• b. Company Size

• c. Operating Leverage

6. A capital structure theories which suggest that a firm can lower its weighted average cost of capital and increase its market value by the judicious use of financial leverage.

• a. Traditional Approach

• b. The MM Approach

• c. Contemporary Approach

7. It is the equity risk that comes from the nature of the firm’s operating activities.

• a. Investment Risk

• b. Business Risk

• c. Financial Risk

8. A theory which asserts that there is an optimal capital structure or at least an optimal range of structures for every firm.

• a. The Traditional Approach

• b. The MM Approach

• c. The Contemporary Approach

9. Refers to the additional risk placed on the ordinary equity shareholders as a result of the decision to finance with debt.

• a. Investment Risk

• b. Business Risk

• c. Financial Risk

10. States that firm’s trade off the tax benefits of debt financing against problems caused by potential bankruptcy.

• a. Capital Structure Policy

• b. Trade-off Theory of Leverage

• d. The Modigliani and Miller Model