Dee Cra) Capital Structure Questions Latest Capital Structure MCO Objective Questions a c PIPE ABA Rel ial Start Complete Exam Preparation Cee roe Weoaa eae Se a Give: {= os Download App Loerie rs Question 1: View this Question Online > Which of the following influence the organisation structure and hence, should be clearly defined? 1. Objectives 2. Span of Control 3. ScalarPrinciple 4, Specialisation 5. None of the above/More thafione of theabove. Answer (Detailed SoltitionBelow) Option 1): Objectives Xcoaching India's Super Teachers for all govt. exams Under One Roof C= uase Sed Capital Structure Question 1 Detailed Solution The correct answer is Objectives. © Key Points + The organization structure of acompany should be aligned with its objectives. + The objectives of the organization define its purpose, direction, and goals + They guide the decision-making processand provide a framework for allocating resources and designing the structure of the organization. + The objectives help determine the various functions, departments, and positions within the organization. + They influence the division of labor, coordination mechanisms,reporting relationships, and the overall hierarchy, + Clear and well-defined objectives provide a basisfor designing an effective and efficient organization structure. © Additional_Information 5 Span of Control: + Span of control refers to the number of subordinates that a manager can effectively supervise. + It determines the levels of hierarchy and the extent of authority. and responsibility within the organization . + Defining the span of control helps in de ng the optimal number of subordinates that a manager can manage efficiently and ensiifegip et there isa proper balance between supervision and autonomy. Scalar Principle: + The scalarprinciple is a management principle that statesthat there should be a clear and unbroken line of authority from the highest to the lowest levels of the organization. + It emphasizesthe hierarchical structure and the chain of command within the organization. + Clearly defining the scalarprinciple ensuresa clear flow of authority and responsibility, avoiding confusion and conflictsin decision-making and communication Specialization: + Specializationrefersto the division of labour and the assignmentof specifictasksand responsibilitiesto individuals or departments based on their expertise and skills. + It allowsindividuals to focus on their areas of specializationand become more proficient in their respective roles.+ Defining specializationwithin the organization structure ensures that there is clarity in roles and responsibilities,and tasksare assigned to individuals or departments based on their capabilities. A Mistake Points According to official question paper, the correct answer is described as option 4 but the ‘most relevant answer is option 1. Hence, ithas been updated. a ieee anu Rect Pela meu) (CM beim ere- relied) eee ete hee kes apse Roscoe Download App ‘Question Bank Prise Question 2: View this Question Online > Assertion (A): According to the trade-off theory of capital structure, a company should aim to strike a balance between the benefits and costsof debt financing. Reason (R): Debt financing provides tex advantages through ‘interest deductibility, but it also exposesthe company to financial distresscosts. 1. Both the assertionand reason are true, afid the reason is the correct explanation of the assertion. - 2. Both the assertionand reason ére true, but the reason is not the correct explanation of the assertion. ~~ assertionis true, but the reasonis false. 4. Theassertionis false, but the reason is true. 5. None of the above Answer (Detailed Solution Below) Option 1: Both the assertionand reason are true, and the reasonis the correct explanation of the assertion.Capital Structure Question 2 Detailed Solution The correct answer is Both the assertion and reason are true, and the reason is the correct explanation of the assertion. © Key Points Assertion (A): According to the trade-off theory of capital structure, a company should. sim to strike a balance between the benefits and costs of debt financing. @ The trade-off theory of capital structure suggeststhat a company should strivéto find theioptimal mix of debt and equity financing. The assertionis true because the trade-off theory highlights the importance of balancing the benefits and costsassociatedwith debt financing. st deductibility, but it Reason (R): Debt financing provides tax advantages. through: inter also exposes the company to financial distress costs. The reason is also true because debt financing provides taxadvantages through interest deductibility, which can lower the company's tax burden. However, it also exposesthe company to financial distresscosts,such as the rigigeg cefault and associatedcosts. Therefore, the reason provides a correct explanation for the @sertion Important Points + The trade-off theory of capital structure suggeststhat companies should aim to strike a balance between the benefits and costsof debt financing. The assertionis true because the trade- off theory recognizes that there are advantagesto using debt asa source of financing, such as the tax deductibility of interest payments, which can lower the company's tax burden and increaseits cashflows. + However, the reason is alsotrue and provides the correct explanation for the assertion. Debt financing exposesa company to financial distresscosts, which can ariseif the company is unable to meet its debt obligations. These costsinclude potential bankruptcy costs,such as legal feesand the loss of reputation, aswell as the potential lossof future financing opportunities due to a damaged crecit rating + Therefore in order to optimize the capital structure, companies need to carefully consider the trade-off between the tax advantages of debt financing and the potential financial distress costsassociatedwith it. They should aim-to find the right mix of debt and equity that minimizes the overall cost of capital and maximizesthe velue of the firm. India’s #1 Learning Platform CR errno tea Start Complete Exam Preparation [ ives sted Dag poco Question Bank Exh Download App Question 3: View this Question Online >Assertion (A): According to the trade-off theory of capital structure, a company should aim to strike a balance between the benefits and costsof debt financit Reason (R): Debt financing provides tex advantages through interest deductibility, but it elso exposesthe company to financial distresscosts. 1. Both the assertionand reason some reason is the correct explanation of the assertion. O 2. Both the schoo are true, but the reason isnot the correct explanation of the asserti S e assertionis true, but the reason is false. 4. The assertionis felse,but the reason is true. Answer (Detailed Solution Below) Option 1: Both the assertionand reason are true, and the reason is the correct explanation of the assertion. Capital Structure Question 3 Detailed Solution The correct answer is Both the assertion and reason are true, and the reason is the correct explanation of the assertion. © Key Points Assertion (A): According to the trade-off theory of capital structure, a company should aim to strike a balance between the benefits and costs of debt financing. The trade- off theory of capital structure suggeststhat a company should strive to find tt mix of debt and equity financing. The assertionis true because the trade-off theory highlight importance of balancing the benefits and costsassociatedwith debt financing. e Reason (R): Debt financing provides tax advantages through int lity, but it also exposes the company to financial distress costs. ry The reason is also true because debt financing provide: es through interest deductibility, which can lower the company's tax b 1, it alsoexposesthe company to financial distresscosts,such as the risk of de! cae iatedcosts. Therefore, the reason provides a correct explanation for the asserti » Important Points ~ + The trade-off theory of capital structure suggests that companies should aim to strike a balance between the benefits and costsof debt financing. The assertionis true because the trade-off theory recognizes that there are advantages to using debt asa source of financing, sch ns the ‘tea. dachiclibilliy of inisfast payments whicli can lower the comnatiy's taxburdenand increaseits cash flows. + However, the reason is alsotrue and provides the correct explanation for the assertion. Debt financing exposesa company to financial distresscosts, which can ariseif the company is unable to meet its debt obligations. These costsinclude potential bankruptcy costs, such as legal feesand the lossof reputation, as well as the potential lossof future financing Opportunities due to a damaged credit rating. + Therefore, in order to optimize the capital structure, companiesneed to carefully consider the trade-off between the tax advantages of debt financing and the potential financial distress costsassociatedwith it. They should aim to find the right mix of debt and equity that minimizes the overall cost of capital and maximizesthe value of the firm. & India's #1 Learning Platform Oa ee cso tout Start Complete Exam Preparation ees eer Download App Question 4: View this Question Online > Which of the following influence the organisation structure and hence, should be clearly defined? 1. Objectives 2. Span of Control 3. ScalarPrinciple 4. Specialisation’ A. (Detailed Solution Below) Option 1 : Objectives Capital Structure Question 4 Detailed Solution The correct answer is Objectives. @ Key Points+ The organization structure of a company should be aligned with its objectives. + The objectives of the organization define its purpose, direction, and goals. + They guide the decision-making processand provide a framework for allocating resourcesand designing the structure of the organization. + The objectives help determine the various functions, departments, and positions within the organization + They influence the division of labor, coordination mechanisms,reporting relationships, and the overall hierarchy. * Clear and well-defined objectives provide a basisfor designing an effectiveand efficient organization structure. ©; Additional_Information ‘Span of Control: + Span of control refers to the number of subordinates that a manager can effectively supervise. + It determines the levels of hierarchy and the extent of authority and responsibility within the organization. : ¥ * Defining the span of control helps in determining the optimal number of subordinates that a Manager can manage efficiently and ensures that there Isa proper balance between supervision and autonomy. ‘ Scalar Principle: unbroken line of authority from. hest to the lowestlevels of the organization. + It emphasizesthe hierarchical and the chain of command within the organization. + Clearly defining the scelarprinciple ensuresa clear flow of authority and responsibility, avoiding confusion and conflictsin decision-making and communication + The scalarprinciple is yaa that statesthat there should be a clear and ‘Specialization: + Specialization refersto the division of labour and the assignmentof specifictasksand responsibilitiesto individuals or departments based on their expertise and skills. + It allowsindividuals to focus on their areas of specializationand become more proficient in their respective roles. + Defining specializationwithin the organization structure ensuresthat there is clarity in roles and responsibilities and tasksare assigned{o individuals or departments based on their capabilities. A Mistake Points ‘According to official question paper, the correct answer is described as option 4 but the most relevant answer is option 1. Hence, ithas been updated. Cal CR ARR Rell RE cena Start Complete Exam Preparation rae CleeDownload App Question 5: View this Question Online > i The Capital Theory Enables Managersto make wise & Decisions ? —" Investment 3. Income and Expenditure 4. Demand and Supply Answer (Detailed Solution Below) Option 2: Capital & Investment Capital Structure Question 5 Detailed Solution The correct answeris Capital & Investment. @ Key Points + The capital theory is the study of models of economic change. + It displaysthe connection between current economic decisions and subsequent levels of output, and it showshow the parts of economic theory, production, slams distribution, etc., relate to each other in @ dynamic context + The traditional theory of capital structure saysthat for any éompany or investment, there is an optimel mix of debt and equity financing thet minimizesthe WACC and maximizesvalue. + The Capital Theory Enables Managers to make wise Capital & Investment Decisions. + Under this theory, the optimal capital structureocourswhere the marginal costof debt is equal to the marginal cost of equity. ‘A od + Thistheory depends on assumptionsthat imply varies with respectto the d f leverage. &; Additional_Information + Capital is @ broad term for anything that gives its owner value or advantage, like a factory and its equipment, intellectual property like patents, or a company's or person's financial assets.Even though money itself can be called capital, the word is usually used to describe money used to make things or invest. + Aninvestment is the purchase of goods that are not consumed today but are used in the ee aN MT OR SGT ge aN ee a a aT 1 the costof elther debt or equity financingSee Pes ances gee eee, See NT ES that the assetwill provide income further or will later be sold at a higher cost price for a profit. Hence, the Capital Theory Enables Managers to make wise Capital & Investment Decisions. a eee ee Pela (CM elma teh iced) Bins Mock Tests MasterCl eresietcg Pretty Download App Question 6 is a combination of various sources of capital. 1. Capital structure 2. Capitalization 3. Financial Structure 4 A... Answer (Detailed Solution Below) Option 1 : Capital structure Capital Structure Question 6 Detailed Solution Correct answeris Capital structure. @ Key Points Capital structure- eDOCS \View this Question online > + The specific ratio of debt to equity utilized to fund a company's assetsand activitiesis referred to asits capital structure.ES Re oa er ee arn ON eRe Eee eee ee SE Cee + It works asa base to determine required rate of return. ©; Additional_Information Capitalization c + A costis included in the value of an essétusing the accounting technique known as capitalization, and is then ceducted during the asset'suseful life rather than being deducted at the time the “esas Financial structure- + In order to meet the company's long-term and short-term capital needs, the financial structure refersto the sourcesof capital and the percentage of financing that comes from short-term liabilities, short-term debt, long-term debt, and equity. Amortization- + Amortization is the process of gradually allocating an asset'spurchase price to an expense over the course of the asset'santicipated useful life, moving the assetfrom the balance sheet to the income statement. rd CR ABR UT Rell) Start Complete Exam Preparation Ree eet Pray Par Crete Hi era Ga cc Download App Question 7: View this Question Online > Which of the following capital structure consistof zero debt components in the structure mix? 1. Pyramid Shaped Capital Structure a A... Shaped Capital Structure 3. Horizontal Capital Structure 4. VerticalCapital StructureAnswer (Detailed Solution Below) Option 3: Horizontal Capital Structure Capital Structure Question 7 Detailed Solution The correct answeris Horizontal Capital Structure Key—Points— Horizontal capital Structure: + Expansion of the firr ich equity and retained earnings only. + In a Horizontal Capital “o, the firm has zero debt components in the capital structure mix. + The structure is quite stable. + Expansion of the firm takes in a lateral manner, i.e. through equity or retained earnings only. - The absence of debt results in the lack of financial leverage + Probability of disturbance of the structure is very less. + In simple words, all the funds required for a particular project are brought out by the ‘owners only. * The firm hasno il of debt in the financial mix. x Rae Reel CRS eer PSE Ta meee clumsy elated) Pea ented Mock Tests rears pre Question 8: View this Question Online > The capital structure is influenced by the of various Sources of capital. 1. Lg Restrictivecovenants 2. TaxadvantageCWB coors 4. None of the Above Answer (Detailed Solution Below) Option 3: Cost of capital Capital Structure Question 8 Detailed Solution The Correct answeris Cost of capital’ ©, oy Poiete- + Capital structure describesthe debt and/or equity used by a company to fund its operations and finance its assetsis referred to asits capital structure. Cost of capital: + The cost of capital is the rate of return that a company must achieve in order to justify the cost of a capital project, as buying new equipment or building anew building. * The cost of capital includes ‘st of both equity and debt, weighted according to the preferred or existing capital re of the company. Restrictive covenants: Thisoption isincorrect becauseRestrictive covenants are not a factor that influences the Capital structure. Tax advantage: This option isincorrect becauseCapital structure describesthe debt and/or equity used by a company to fund its operations and finance its assetsis referred to asits capital structure. Cost of capital: This option is correct because The costof capitalincludes the cost of both equity and debt, weighted according to the preferred or existing capital structure of the company. None of the Above: Thisoption is incorrect because one of the above options is incorrect. ae ie anu Bec Start Complete Exam Preparation aCe a cet Gikees ohes Par [ests Coro Ext:ownload App Question 9: View this Question Online > Name the decision which affectsboth the profitability and the financial risk. 1. Financial planning decision 2 ~~" decision 3. Capital structure decision 4. Allof the above Answer (Detailed Solution Below) Option 3 : Capital structure decision Capital Structure Question 9 Detailed Solution The correct answeris Capital structure decision © KeyPoints— + Capital Structure, means arranging capital from various sources in order to meet the need for long-term funds for the business. + It combines equities, rence share capital, long-term loans, debentures, retained eamings, and various other long-term sources of funds. + Capital structure refers to ‘= proportion of each of these sources of funds in the capital, which the company should raise or arrange to carry out its businesseffectively. + Thus, capital structure is extremely important. + Capital structure decisionsor practiceshave a significant role to play in corporate financial management. re eee eau) Start Complete Exam Preparation CBee com ele bes bee MasterC! resieacrig Exeter)Jownload App Question 10: View this Question Online > The minimum required rate of earnings or the capital expenditure cut-off rate is: 1 Cost of capital 2. Working capital” ~ Equity capital 4. None of the above Answer (Detailed Solution Below) Option 1: Cost of capital Capital Structure Question 10 Detailed Solution The Correct answeris ‘Cost of capital’. Cost of capital: + The cost of capital is the rate of return that a Company must achieve in order to justify the cost of a capital project, such as buying new equipment or building anew building. + The costof capital includes the cost of both equity and debt, weighted according to the preferred or existing capital eof the company. #® Important Points srasisaae cial Sinema arses ean cca te a a i am acompany must achieve in order to justify the cost of a capital project, such as buying new equipment or building anew building. Working capital: Thisoption is incorrect because Working Capital means the difference between Current assetsand Current Liabilities Equity capital: This option is incorrect because Any company's long-term financing sources are equity shares. Thesesharesare available to the general public and are not redeemable None of the Above: Thisoption is incorrect because one of the above option is incorrect. Fo ieee anu Reet Start Complete Exam Pr 16,00, 449 Student if rari ented Dac err Cress Exot jownload App Question 11: View this Question Online > Capital structure shows 1. Debtor-creditor ratio 2. Debt- equityyratio. = 3. PB ccctren assetsratio 4. Interest coverage ratio Answer (Detailed Solution Below) Option 2: Debt- equity ratio Capital Structure Question 11 Detailed Solution The correct answeris Debt-equity ratio © Key_Points—Capital structure refers to the specific mix of debt and equity used to finance a company's assetsand operations. Fram a corporate perspective, equity represents a more expensive, permanent source of capital with greater financial flexibi + The arrangement of capital by using different sourcesof long term funds which consistsof two broad types, equity a t + The different types ig are raised by a firm include preference shares, equity shares, retained ea ng-term loans etc. + The debt-to-equity (D/E) ratio compares a company’s total liabilities to its shareholder ‘equity and can be uses to eveluate how much leverage a company is using. + Higher-leverage ratios tend to indicate a company or stock with higher risk to ‘shareholders. + However, the D/E ratio is difficult to compare across industry groups where ideal amounts of debt will vary. - Investors will often modify the D/E ratio to focuson long-term debt only becausethe risks associatedwith long- term liabilities are different than short-term debt and payables. & Ss rN India’s #1 Learning Platform “Saal Ea ay Pela meri) M Cima lle h iced) Capo ocd eles uizzes Us} Mastercl Coa iets Download App Question 12: View this Question Online > Which of the following influence the organisation structure and hence, should be clearly defined? 1. Objectives 2. Span of Control 3. ScalarPrinciple 9 , 4. Specialisation xr. (Detailed Solution Below) Option 1: ObjectivesCapital Structure Question 12 Detailed Solution The correct answer is Objectives. © Key Points + The organization structure of a company should be aligned with its objectives. + The objectives of the organization define its purpose, direction, end goals. + They guide the decision-making processand provide a framework for allocating resourcesand designing the structure of the organization. + The objectives help determine the various functions, departments, and positions within the organization. + They influence the division of labor, coordination mechanisms,reporting relationships, and the overall hierarchy. + Clear and well-defined objectives provide a basisfor designing an effectiveand efficient organization structure. 6; Additional_Information ‘Span of Control: go + Span of control refers to the number of subordinates that a manager can effectivel supervise. + It determines the levels of hierarchy and the extent of authority and responsibilty ithin the organization. + Defining the span of control helps in determining the optimal number Ridl bordinates that a manager can manage efficiently and ensures that there ey balance between supervision and autonomy. Scalar Principle: unbroken line of authority from hest to the lowestlevels of the organization. + It emphasizesthe hierarchical ‘and the chain of command within the organization. * Clearly defining the scelarprinciple ensuresa clear flow of authority and responsibility, avoiding confusion and conflictsin decision-making and communication. + The scalarprinciple is et iple that statesthat there should be a clear and Specialization: * Specializationrefers to the division of labour and the assignmentof specifictasksand responsibilitiesto individuals or departments based on their expertise and skills. + It allowsindividuals to focus on their areas of specializationand become more proficient in their respective roles. + Defining specializationwithin the organization structure ensuresthat there is clarity in roles and responsibilities,and tasksare assignedto individuals or departments based on their capabllities. A Mistake Points According to official question paper, the correct answer is described as option 4 but the most relevant answer is option 1. Hence, it has been updated. eee ene eto Pee PSE Ta meee clumsy elated) rieQuestion 13: View this Question Online > The composition of a firms capitalization is referred to as. 1. Capital structure m4 2. Capital budgeting 3 ms 4 None of the Above Answer (Detailed Solution Below) Option 1: Capital structure Capital Structure Question 13 Detailed Solution The Correct answeris ‘Capital structure’ @ Capital structure: + Capital structure describesthe debt and/or equity used by a company to fund its operations and finance its assetsis referred to asits capital structure. + Firms must make tradeoffs when deciding whether to finance operations with debt or equity, and managers mustbalance the two to‘find the optimal capital structure. - Poi a) Capital re: Thisoption isCortect because Capital structure cescribesthe debt and/or equity used by a company to fund its operations and finance its assetsis referred to asits capital structure. Capital budgeting: Thisoption isincorrect becauseThe term Capital budgeting is the processby which a project or investment of a company evaluates.Equity shares: This option is incorrect because Any company’s long-term financing sources are equity shares . Thesesharesare available to the general public and are not redeemable None of the Above: Thisoption is incorrect because one of the above options is incorrect. India’s #1 Learning Platform Start Complete Exam Preparation CCC CD coi end Jc rhea (HB) Gistn oan Download App Exerc 2) Gree Question 14: View this Question Online > is a combination of various sources of capital. 1. Capital structure 2. Capitalization , 3. Financial Structure, Answer (Detailed Solution Below) Option 1: Capital structure Capital Structure Question 14 Detailed Solution Correct answeris Capital structure. © Key Points Capital structure- + The specific ratio of debt to equity utilized to und a company’s assetsand activitiesis referred to asits capital structure. + A ideal capital structure should have minimum cost of capital. + It works asa base to determine required rate of return.@ Agaitional inrormation Capitalization- + A ccostis included in the value of an assetusing the accounting technique known as capitalization, and is then cecucted during the asset'susefullife rather than being deducted at the time the osu Financial structure- + In order to meet the company's long-term and short-term capital needs, the financial structure refersto the sourcesof capital and the percentage of financing that comes from short-term liabilities, short-term debt. long-term debt, and equity. Amortization + Amortization is the process of graduzlly allocating an asset'spurchase price to an expense over the course of the asset'santicipated useful life, moving the assetfrom the balance sheet to the income statement. Teer Eee Oe aR rae Start Complete Exam Preparation eee (ere Go ee Download App Question 15: View this Question Online > The firm's market value is the result of. t Decisionson dividends ‘ Es Decisionson working capital ~ Capital budgeting decisionsRisk versus return trade-off Answer (Detailed Solution Below) Option 4 Risk versus return trade- off Capital Structure Question 15 Detailed Solution @ Risk versus return trade-off: ‘The Correct answeris ‘Risk versus return trade-off’. N\A G + The risk-retum tradeoff statesthat as risk increa he potential retum. ~ Low levels of uncertainty or risk are associat potential returns, whereas high levels. + In short Making decisions jn such the balance of risk and return is optimized is called Risk versus retui - off. > Decisions on dividends: This Option is Incorrect becausedividend Decision of the firms influenced the shareholder's perception and Wealth Creation. Decisions on working capital: This Option is Incorrect because Working Capital is the Capital required for day to day businessoperation. Capital budgeting decisions: ThisOption is Incorrect becauselong term investments decision is taken based on Capital budgeting. Risk versus return trade-off: This Option is correct because Individuals associate ow levels of uncertainty or risk ate associatedwith low potential returns, whereas high levels