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MCQ on Capital Structure Decisions

1. The manner in which an organization’s assets are financed is referred to as its –
(A) Capital structure
(B) Financial structure
(C) Asset structure
(D) Owners structure

2. Which of the following is not included in the capital structure?
(A) Long term debt
(B) Preferred stock
(C) Current assets
(D) Retained earnings

3. Financial structure is ______ concept while the capital structure is _____ concept.
(A) Inappropriate; appropriate
(B) Appropriate; inappropriate
(C) Narrow; border
(D) Border; narrow

4. The optimal capital structure consists of –
(A) Appropriate mix of fixed assets and current assets
(B) Appropriate mix of long-term debts and fixed assets
(C) Appropriate mix of sales and profit
(D) Appropriate mix of debt and equity

5. Which of the following capital structure consist of zero debt components in the structure mix?
(A) Pyramid Shaped Capital Structure
(B) Inverted Pyramid Shaped Capital Structure
(C) Horizontal Capital Structure
(D) Vertical Capital Structure

6. If the debt component in the capital structure is predominant –
(A) The fixed interest cost of the firm will be minimum thereby decreasing its risk
(B) Earnings per share (EPS) will be very low
(C) Dividend expectations of equity shareholders are also and P/E Ratio may decrease
(D) The fixed interest cost of the firm increases thereby increasing its risk

7. Capital structure relates to capital deployment for the creation of assets.
(A) Long term; long term
(B) Long term; short term
(C) Short term; long term
(D) Short term; short term

8. _____ refers to the mix of a firm’s capitalization and includes long term sources of funds.
(A) Leverage
(B) Capital structure
(C) Debt mix
(D) Owner’s equity

9. One can design a capital structure with proper proportions of equity, preference, and debt mix. The choice of the combination of these sources is called –
(A) Structural mix
(B) Policy mix
(C) Capital structure mix
(D) Finance mix

10. Which of the following shows the significance of capital structure?
(A) Capital structure reflects the overall strategy of the firm.
(B) One can get a reasonably accurate broad idea about the risk profile of the firm from its capital structure.
(C) The capital structure acts as a tax management tool.
(D) All of the above

11. Which of the following statement is false?
(A) The use of excessive debt threatens the solvency of the company
(B) A firm having operating loss would find it worthwhile to incorporate debt in the capital structure in a greater measure
(C) The capital structure should be flexible
(D) None of the above

12. The term “capital structure” refers to:
(A) Current assets & current liabilities
(B) Long-term debt, preferred stock, and common stock equity
(C) Total assets minus liabilities
(D) Shareholders’ equity

13. One can get a reasonably accurate broad idea about the risk profile of the firm from its –
(A) Dividend policy
(B) Capital structure
(C) Debt service ratio
(D) Earning yield

14. Which of the following changes in capital structure would you recommend for growth at a faster rate?
(A) Incorporate more retained earnings out of profit and loss accounts
(B) Incorporate debt in its capital structure to a greater extent
(C) Merge with other companies
(D) Pay more dividends to equity shareholders

15. According to Cost Principle, an ideal pattern or capital structure is one that –
(A) Minimizes cost of capital structure
(B) Maximizes earnings per share (EPS).
(C) Both (A) and (B)
(D) None of the above

16. Which term would most likely be associated with the phrase “actions speak louder than words”?
(A) Incentive signaling
(B) Shareholder wealth maximization
(C) Financial signaling
(D) Optimal capital structure

17. The decisions regarding the forms of financing, their requirements, and their relative proportions in total capitalization are known as –
(A) Equity decisions
(B) Equilibrium decisions ‘
(C) Outright decisions
(D) Capital structure decisions

18. External sources of finance do not include:
(A) Overdrafts
(B) Leasing
(C) Retained earnings
(D) Debentures

19. Internal sources of finance do not include:
(A) Retained earnings
(B) Ordinary shares
(C) Better management of working capital
(D) Trade credit

20. Which of the following step would you recommend to avoid the negative consequences of overcapitalization?
(A) Company should go for thorough reorganization.
(B) Buyback of shares.
(C) Reduction in claims of debenture-holders and creditors.
(D) All of the above

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