Capital Structure MCQ: Multiple Choice Questions and Answers

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Financial Management MCQ

Capital Structure MCQ

Mention Below are the MCQ on capital structure chapter of financial management. With this MCQ you can understand the Capital Structure easily and you can also prepare for your exam and competitive exam.

Multiple Choice Questions and Answers

1. The term “Capital structure” refers to the relationship between:

  1. Debentures, preference share and equity share capital.
  2. Current assets and current liabilities
  3. Sum of all non-current assets
  4. Sum of all outsider’s liabilities

Answer :- Debentures, preference share and equity share capital.

2. Which of the following is not true about capital structure?

  1. Proportion of various types of securities is known as capital structure.
  2. Capital structure is also known as capitalisation.
  3. Capital structure and financial structure are different.
  4. All of the above

Answer :- Proportion of various types of securities is known as capital structure.

3. Which of the following is not a pattern of capital structure?

  1. Equity shares and Preference shares
  2. Equity shares, preference shares and debentures
  3. Equity shares only
  4. Equity shares and short term borrowings.

Answer :- Equity shares and short term borrowings.

4. Which of the following is not true about capital structure?

  1. The traditional approach says that a firm may attain an optimal capital structure.
  2. There is difference of opinion on the relationship between capital structure and value of the firm.
  3. Capital structure does not include short term liabilities.
  4. The financing decision affects the total operating profits of the firm.

Answer :- The financing decision affects the total operating profits of the firm.

5. The NI Approach assumed:

  1. ke is to be same and constant.
  2. There are no taxes
  3. k0 falls as the degree of leverage is increased
  4. All of the above

Answer :- All of the above

6. Which of the following is true for Net Income Approach?

  1. Higher debt increases value of the firm
  2. Higher Debt is better
  3. Lower debt increases WACC
  4. All of the above

Answer :- Higher Debt is better

7. In case of Net Income Approach, the Cost of equity is:

  1. Constant
  2. Fixed
  3. Increasing
  4. Decreasing

Answer :- Constant

8. Which of the following is true of Net Income Approach?

  1. VF = VE+VD
  2. VE = VF+VD
  3. VD = VF+VE
  4. VF = VE-VE

Answer :- VF = VE+VD

9. Which of the following statement are false?

  1. NI approach shows the effect of leverage on overall cost of capital.
  2. The ultimate conclusions of NI approach and the NOI approach are same.
  3. The equity Shareholders get the residual profit of the firm.
  4. Every capital is the optimum capital structure as per NOI approach.

Answer :- The ultimate conclusions of NI approach and the NOI approach are same.

10. NI and NOI approach has been suggested by:

  1. FW Taylor
  2. David Durand
  3. Marshall Edgeworth
  4. Fisher

Answer :- David Durand

11. In NOI Approach, which one of the lowing is constant?

  1. Cost of Equity
  2. Cost of Debt
  3. Overall cost of capital (WACC) & kd
  4. Ke and Kd

Answer :- Overall cost of capital (WACC) & kd

12. According to the net operating income approach:

  1. Financial mix is irrelevant and it does not affect the value of the firm.
  2. The business risk remains constant at every level of debt equity mix.
  3. The market value of equity is calculated by deducting market value of debt from total market value of a firm.
  4. All of the above.

Answer :- All of the above.

13. Which of the following is not true about NOI?

  1. In NOI approach, Kd and K0 are taken as constant.
  2. In NOI approach says that there is no optimal capital structure.
  3. Every capital is the optimum capital structure as per NOI approach.
  4. At optimal capital structure, the k0 of the firm is highest.

Answer :- At optimal capital structure, the k0 of the firm is highest.

14. The traditional approach is also known as:

  1. NI approach
  2. NOI Approach
  3. MM Approach
  4. Intermediate approach

Answer :- Intermediate approach

15. ‘Judicious use of leverage’ is suggested by:

  1. Net Income Approach
  2. Net Operating Income Approach
  3. Traditional Approach
  4. All of the above.

Answer :- Traditional Approach

16. In the Traditional Approach, which one of the following remains constant?

  1. Cost of Equity
  2. Cost of Debt
  3. WACC
  4. None of the above.

Answer :- None of the above.

17. In MM-Model, irrelevance of capital structure is based on:

  1. Cost of Debt
  2. Cost of equity
  3. Arbitrage Process
  4. All of the above.

Answer :- Arbitrage Process

18. If taxes are ignored, the MM model is identical to:

  1. NI Approach
  2. NOI Approach
  3. Traditional Approach
  4. All of the above

Answer :- NI Approach

19. If taxes are assumed to exist, the MM model is identical to:

  1. NI Approach
  2. NOI Approach
  3. Traditional Approach
  4. All of the above

Answer :- NOI Approach

20. Which of the following is not correct about MM model?

  1. MM model provides a behavioural justification of NOI approach.
  2. In MM model, personal leverage and corporate leverage are considered as perfect substitute.
  3. In the basic MM model, leverage affects the value of the firm.
  4. In the MM model, the value of the levered firm can be found by first finding out the value of the unlevered firm.

Answer :- In the basic MM model, leverage affects the value of the firm.           

21. There are no corporate taxes. This is assumed by which of the following approach?

  1. NI Approach
  2. NOI Approach
  3. Traditional Approach
  4. All of these.

Answer :- All of these.

22. MM approach is known as theory of irrelevance when it is assume that there is:

  1. Absence of taxes
  2. Presence of taxes.
  3. Investors act rationally.
  4. All of the above.

Answer :- All of the above.

23. MM approach is known as theory of relevance when it is assume that there is:

  1. Absence of taxes
  2. Presence of taxes.
  3. Investors act rationally.
  4. All of the above.

Answer :- Presence of taxes.

24. MM Approach Assumes:

  1. The dividend payout ratios is 100% i.e., there is no retained earnings.
  2. Capital markets are assumed to be perfect.
  3. Investors acts rationally.
  4. All of the above.

Answer :- All of the above.

25. ‘That personal leverage can replace corporate leverage’ is assumed by:

  1. Traditional Approach
  2. MM Model
  3. Net Income Approach
  4. Net Operating Income Approach.

Answer :- MM Model

26. Which of the following argues that the value of levered firm is higher than that of the unlevered firm?

  1. Net Income Approach
  2. Net Operating Income Approach
  3. MM Model with taxes
  4. Both (a) and (c).

Answer :- Both (a) and (c).   

27. Which of the following is incorrect for value of the firm?

  1. In the initial preposition, MM Model argues that value is independent of the financing mix.
  2. Total value of levered and unlevered firms is otherwise arbitrage will take place.
  3. Total value incorporates borrowings by firm but excludes personal borrowing.
  4. Total value does not change because underlying does not change with financing mix.

Answer :- Total value does not change because underlying does not change with financing mix.

28. According to MM approach, the total value of the firm is:

  1. Static
  2. Increased with increase in WACC
  3. Increased with decrease in WACC
  4. Variable

Answer :- Static

29. Capital gearing refers to relationship between equity and:

  1. Short term debt
  2. Long term debt
  3. Retained earnings
  4. Goodwill

Answer :- Long term debt

30. In case of depression, it is better for a company to remain in:

  1. Low gear
  2. High gear
  3. Shut down their business
  4. None of the above

Answer :- Low gear

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