#1
What is capital structure?
The mix of debt and equity used to finance a company's operations
ExplanationDefines the financing composition of a company.
#2
What is financial risk?
The risk of not achieving expected returns due to financing decisions
ExplanationRisks associated with not meeting expected returns from financing choices.
#3
What is meant by the term 'financial leverage'?
Using debt financing to increase potential returns for shareholders
ExplanationUtilizing debt to amplify shareholder returns.
#4
What does the term 'capital structure' refer to in finance?
The mix of debt and equity financing used to fund a company's operations
ExplanationDefines the composition of financing sources in a company.
#5
What is the primary goal of capital structure management for a company?
Maximizing shareholder wealth
ExplanationFocuses on enhancing shareholder value.
#6
Which of the following is true regarding financial leverage?
It increases the variability of a company's earnings
ExplanationHighlights the impact of leverage on earnings volatility.
#7
What is the Modigliani-Miller theorem about?
Capital structure irrelevance under certain conditions
ExplanationStates conditions where capital structure does not affect firm value.
#8
What does the pecking order theory suggest about corporate financing?
Companies prefer internal financing over external financing
ExplanationIndicates the preference for internal funds over external sources.
#9
What is the optimal capital structure according to the traditional theory of capital structure?
High debt, low equity financing
ExplanationSuggests an ideal balance between debt and equity.
#10
What does the trade-off theory of capital structure suggest?
Companies should balance the benefits of debt financing with the costs of financial distress
ExplanationEmphasizes balancing benefits and costs of debt in financing.
#11
How does the weighted average cost of capital (WACC) incorporate a company's capital structure?
It is calculated as the average cost of all sources of capital, weighted by their respective proportions in the capital structure
ExplanationExplains the calculation method considering the proportional financing costs.
#12
What is the purpose of the debt-to-equity ratio?
To evaluate a company's financial leverage
ExplanationAssessment tool for understanding a company's leverage.
#13
According to the Modigliani-Miller theorem, in a perfect market, what determines a firm's value?
The underlying cash flows generated by its assets
ExplanationAttributes firm value to asset-generated cash flows in perfect markets.
#14
What is meant by the term 'financial distress costs'?
The costs incurred when a company cannot meet its debt obligations
ExplanationExpenses arising from the failure to meet debt obligations.
#15
What is the role of a financial manager in capital structure decisions?
To determine the optimal mix of debt and equity financing
ExplanationResponsibility for finding the best debt-equity balance.