Capital Structure Quiz

Which of the following best defines capital structure?

• Combination of assets and liabilities

• Mix of long-term debt and equity used by a firm

• Total assets used in the business

• Working capital decisions

According to Modigliani-Miller (MM) Proposition I (without taxes), the value of the firm is:

• Dependent on its capital structure

• Maximized with more debt

• Independent of its capital structure

• Minimum with zero debt

Under the Trade-Off Theory, a firm should borrow up to the point where:

• Tax savings from debt equals bankruptcy cost

• Debt is zero

• Debt equals equity

• Interest is less than dividend

Which of the following is a feature of Pecking Order Theory?

• Firms prefer debt over equity

• Firms prefer equity over debt

• Firms have no order in financing

• Firms prefer internal financing first

Which component is not considered in calculating WACC?

• Cost of debt

• Cost of equity

• Return on assets

• Tax rate

Business risk is associated with:

• Changes in tax rates

• Changes in operating income

• Changes in capital structure

• Changes in dividend policy

Financial leverage primarily affects a firm's:

• Sales volume

• Operating profit

• Earnings per share

• Working capital

Which of these will increase a firm's financial risk?

• Issuing more equity

• Retiring debt

• Increasing debt-to-equity ratio

• Increasing working capital

A firm with high fixed operating costs and high debt levels faces:

• Low total risk

• Low financial risk

• High combined risk

• High profitability

Which theory assumes perfect capital markets and no taxes?

• Static Trade-Off Theory

• Modigliani-Miller without tax

• Pecking Order Theory

• Agency Cost Theory