Capital Structure MCQs
What does the capital structure of a company refer to?
A) The mix of debt and equity used to finance the company’s operations
B) The company’s asset allocation
C) The company’s dividend policy
D) The company’s cash flow management
Answer: A) The mix of debt and equity used to finance the company’s operations
Which of the following is a component of equity in capital structure?
A) Bonds
B) Preferred Stock
C) Long-term Loans
D) Trade Payables
Answer: B) Preferred Stock
What is the formula for the Debt to Equity Ratio?
A) Total Debt / Total Equity
B) Total Liabilities / Total Assets
C) Total Debt / Total Assets
D) Total Equity / Total Debt
Answer: A) Total Debt / Total Equity
Which capital structure component generally has a higher risk but also potentially higher returns?
A) Debt
B) Equity
C) Preferred Stock
D) Long-term Loans
Answer: B) Equity
Which ratio measures the proportion of debt in a company’s capital structure?
A) Debt Ratio
B) Equity Ratio
C) Debt to Equity Ratio
D) Interest Coverage Ratio
Answer: A) Debt Ratio
The formula for the Equity Ratio is:
A) Total Equity / Total Assets
B) Total Debt / Total Assets
C) Total Equity / Total Debt
D) Total Assets / Total Equity
Answer: A) Total Equity / Total Assets
Which of the following is considered a part of debt in the capital structure?
A) Common Stock
B) Bonds Payable
C) Retained Earnings
D) Treasury Stock
Answer: B) Bonds Payable
Which of the following is true about a company with high financial leverage?
A) The company has a higher proportion of equity in its capital structure.
B) The company has a lower risk of bankruptcy.
C) The company has a higher proportion of debt in its capital structure.
D) The company has lower interest expenses.
Answer: C) The company has a higher proportion of debt in its capital structure.
What does the term ‘leverage’ refer to in capital structure?
A) The use of equity to finance operations
B) The use of debt to finance operations
C) The company’s market value of equity
D) The company’s dividend policy
Answer: B) The use of debt to finance operations
Which ratio indicates the ability of a company to meet its interest payments?
A) Debt to Equity Ratio
B) Interest Coverage Ratio
C) Debt Ratio
D) Equity Ratio
Answer: B) Interest Coverage Ratio
The formula for the Interest Coverage Ratio is:
A) Earnings Before Interest and Taxes (EBIT) / Interest Expense
B) Net Income / Interest Expense
C) Total Debt / EBIT
D) EBIT / Total Debt
Answer: A) Earnings Before Interest and Taxes (EBIT) / Interest Expense
What is the primary advantage of using debt in a company’s capital structure?
A) Debt financing is generally more expensive than equity.
B) Interest on debt is tax-deductible.
C) Debt does not require regular payments.
D) Debt increases the company’s ownership stake.
Answer: B) Interest on debt is tax-deductible.
The formula for the Debt Ratio is:
A) Total Debt / Total Assets
B) Total Equity / Total Assets
C) Total Debt / Total Equity
D) Total Assets / Total Equity
Answer: A) Total Debt / Total Assets
Which of the following is a potential disadvantage of high leverage?
A) Increased financial risk
B) Lower interest expenses
C) Greater financial flexibility
D) Lower risk of bankruptcy
Answer: A) Increased financial risk
Which financial metric is used to assess the proportion of a company’s capital structure that is financed by equity?
A) Debt to Equity Ratio
B) Equity Ratio
C) Debt Ratio
D) Interest Coverage Ratio
Answer: B) Equity Ratio
Which of the following components is considered a part of a company’s capital structure?
A) Cash and Cash Equivalents
B) Accounts Receivable
C) Long-term Debt
D) Inventory
Answer: C) Long-term Debt
The formula for the Debt to Equity Ratio is:
A) Total Debt / Total Equity
B) Total Equity / Total Debt
C) Total Liabilities / Total Assets
D) Total Debt / Total Assets
Answer: A) Total Debt / Total Equity
What is meant by ‘financial leverage’?
A) Using cash to finance operations
B) Using equity to finance operations
C) Using debt to finance operations
D) Using retained earnings to finance operations
Answer: C) Using debt to finance operations
Which of the following ratios is used to measure the proportion of debt financing relative to total capital?
A) Debt Ratio
B) Equity Ratio
C) Debt to Equity Ratio
D) Interest Coverage Ratio
Answer: A) Debt Ratio
The formula for the Financial Leverage Ratio is:
A) Total Assets / Total Equity
B) Total Debt / Total Assets
C) Net Income / Total Equity
D) Total Equity / Total Debt
Answer: A) Total Assets / Total Equity
Which capital structure decision involves choosing between issuing equity or debt to fund operations?
A) Financing Decision
B) Investment Decision
C) Dividend Decision
D) Operating Decision
Answer: A) Financing Decision
Which of the following is a characteristic of equity financing?
A) Fixed repayment schedules
B) No interest payments
C) Tax-deductible interest
D) Fixed maturity dates
Answer: B) No interest payments
Which ratio is calculated as total debt divided by total assets?
A) Debt Ratio
B) Debt to Equity Ratio
C) Equity Ratio
D) Interest Coverage Ratio
Answer: A) Debt Ratio
The formula for the Equity Multiplier is:
A) Total Assets / Total Equity
B) Total Debt / Total Equity
C) Total Equity / Total Assets
D) Net Income / Total Assets
Answer: A) Total Assets / Total Equity
Which ratio measures how many times a company’s earnings can cover its interest expenses?
A) Debt to Equity Ratio
B) Interest Coverage Ratio
C) Debt Ratio
D) Equity Ratio
Answer: B) Interest Coverage Ratio
Which of the following is a disadvantage of high leverage?
A) Lower financial risk
B) Increased cost of equity
C) Increased interest expenses
D) Lower potential returns
Answer: C) Increased interest expenses
The formula for the Return on Equity (ROE) is:
A) Net Income / Total Equity
B) Net Income / Total Assets
C) EBIT / Net Sales
D) Gross Profit / Total Assets
Answer: A) Net Income / Total Equity
Which financial metric indicates how well a company is utilizing its debt to generate profits?
A) Return on Assets
B) Return on Equity
C) Interest Coverage Ratio
D) Debt Ratio
Answer: B) Return on Equity
Which ratio is used to measure the proportion of total capital that is financed by debt?
A) Debt Ratio
B) Equity Ratio
C) Debt to Equity Ratio
D) Interest Coverage Ratio
Answer: A) Debt Ratio
The formula for the Weighted Average Cost of Capital (WACC) is:
A) (Cost of Debt * (1 – Tax Rate) * Debt Ratio) + (Cost of Equity * Equity Ratio)
B) Cost of Debt + Cost of Equity
C) (Cost of Equity / Equity Ratio) + (Cost of Debt * Debt Ratio)
D) Cost of Equity – Cost of Debt
Answer: A) (Cost of Debt * (1 – Tax Rate) * Debt Ratio) + (Cost of Equity * Equity Ratio)
Which of the following is an advantage of equity financing?
A) No obligation to repay capital
B) Fixed interest payments
C) Tax-deductible interest
D) Increased financial risk
Answer: A) No obligation to repay capital
What is the purpose of capital structure optimization?
A) To minimize tax liability
B) To maximize shareholder value
C) To minimize interest expenses
D) To increase inventory turnover
Answer: B) To maximize shareholder value
Which of the following is a key consideration in capital structure decisions?
A) The company’s dividend policy
B) The company’s market share
C) The company’s cost of debt and equity
D) The company’s inventory levels
Answer: C) The company’s cost of debt and equity
The formula for calculating the proportion of debt in total capital is:
A) Total Debt / (Total Debt + Total Equity)
B) Total Equity / Total Debt
C) Total Debt / Total Assets
D) Total Equity / (Total Debt + Total Equity)
Answer: A) Total Debt / (Total Debt + Total Equity)
Which of the following is a financial metric that measures a company’s ability to meet short-term obligations?
A) Current Ratio
B) Debt Ratio
C) Equity Ratio
D) Return on Equity
Answer: A) Current Ratio
What does a high debt to equity ratio generally indicate about a company’s capital structure?
A) The company is less leveraged and relies more on equity.
B) The company is highly leveraged and relies more on debt.
C) The company has a balanced capital structure.
D) The company has no debt in its capital structure.
Answer: B) The company is highly leveraged and relies more on debt.
Which of the following best describes the concept of financial leverage?
A) The use of equity to finance operations
B) The use of debt to increase potential returns on equity
C) The use of retained earnings to finance operations
D) The use of cash reserves to finance operations
Answer: B) The use of debt to increase potential returns on equity
The formula for calculating the debt-equity ratio is:
A) Total Debt / Total Equity
B) Total Equity / Total Debt
C) Total Debt / Total Assets
D) Total Assets / Total Equity
Answer: A) Total Debt / Total Equity
Which of the following ratios would indicate a company with a strong capital structure?
A) High Debt to Equity Ratio
B) High Equity Ratio
C) Low Interest Coverage Ratio
D) High Debt Ratio
Answer: B) High Equity Ratio
Which capital structure decision involves selecting the most appropriate mix of debt and equity financing?
A) Financing Decision
B) Dividend Decision
C) Investment Decision
D) Operating Decision
Answer: A) Financing Decision
What impact does increasing debt in a company’s capital structure generally have on financial risk?
A) Decreases financial risk
B) No impact on financial risk
C) Increases financial risk
D) Reduces operational risk
Answer: C) Increases financial risk
The formula for calculating the capital gearing ratio is:
A) Debt / (Debt + Equity)
B) Equity / (Debt + Equity)
C) Debt / Total Assets
D) Total Assets / Equity
Answer: A) Debt / (Debt + Equity)
Which of the following is a characteristic of debt financing?
A) Dividends paid to shareholders
B) Interest payments
C) No obligation to make regular payments
D) No fixed maturity date
Answer: B) Interest payments
Which financial metric assesses how effectively a company is using its financial leverage to generate profits?
A) Return on Equity (ROE)
B) Return on Assets (ROA)
C) Debt Ratio
D) Equity Ratio
Answer: A) Return on Equity (ROE)
What does a high equity ratio indicate about a company’s financial structure?
A) The company is highly leveraged with significant debt.
B) The company has a lower proportion of debt in its capital structure.
C) The company has high financial risk.
D) The company relies primarily on short-term financing.
Answer: B) The company has a lower proportion of debt in its capital structure.
Which of the following is true about equity financing compared to debt financing?
A) Equity financing typically involves regular interest payments.
B) Equity financing does not require fixed repayments or interest payments.
C) Equity financing generally involves tax-deductible expenses.
D) Equity financing often leads to increased financial leverage.
Answer: B) Equity financing does not require fixed repayments or interest payments.
Which capital structure ratio is useful for assessing the company’s long-term financial stability?
A) Debt to Equity Ratio
B) Current Ratio
C) Quick Ratio
D) Working Capital Ratio
Answer: A) Debt to Equity Ratio
The formula for the Capital Gearing Ratio is:
A) Debt / (Debt + Equity)
B) Equity / (Debt + Equity)
C) Total Debt / Total Equity
D) Debt / Total Assets
Answer: A) Debt / (Debt + Equity)
What effect does increasing equity financing have on the cost of capital?
A) It generally increases the cost of capital.
B) It generally decreases the cost of capital.
C) It has no impact on the cost of capital.
D) It makes the cost of debt more expensive.
Answer: B) It generally decreases the cost of capital.
Which of the following is a primary objective of capital structure management?
A) Maximizing financial risk
B) Minimizing operational costs
C) Maximizing shareholder value
D) Reducing inventory levels
Answer: C) Maximizing shareholder value