Capital Structure MCQs 2026

Optimal capital structure minimizes

1. Atotal assets always✓
2. Bnumber of employees✓
3. Cweighted average cost of capital✓
4. Dmarketing budget✓

Homemade leverage concept in MM means

1. Afirms cannot issue debt✓
2. Bbanks prohibit personal loans✓
3. Cinvestors can replicate firm leverage personally✓
4. Dequity cannot be traded✓

Financial distress costs include

1. Aonly accounting depreciation✓
2. Bonly dividend taxes✓
3. Conly stock split costs✓
4. Dlegal fees, lost customers, and managerial distraction✓

Capital structure scenario 39: debt ratio 116% and equity 15%. Financial leverage implication is

1. Aelevated fixed financial obligations increasing EPS volatility✓
2. Bzero leverage because equity exists✓
3. Cleverage determined solely by inventory turnover✓
4. Ddebt ratio irrelevant to financial risk✓

Capital structure scenario 6: debt ratio 33% and equity 68%. Financial leverage implication is

1. Azero leverage because equity exists✓
2. Bmoderate leverage with greater equity buffer for creditors✓
3. Cleverage determined solely by inventory turnover✓
4. Ddebt ratio irrelevant to financial risk✓

Capital structure refers to

1. Aproduct mix in retail✓
2. Bgeographic market mix✓
3. Cmix of debt and equity financing a firm employs✓
4. Dinventory classification only✓

Financial leverage magnifies

1. Aoperating fixed costs only✓
2. Breturn volatility to equity holders✓
3. Craw material prices only✓
4. Demployee count only✓

Modigliani-Miller Proposition I without taxes states

1. Adebt always increases value✓
2. Bequity is always cheaper than debt✓
3. Cfirm value is independent of capital structure in perfect markets✓
4. DWACC increases with leverage linearly✓

Interest tax shield from debt

1. Aincreases taxable income✓
2. Beliminates need for equity✓
3. Cis irrelevant under any tax system✓
4. Dreduces corporate tax and can increase firm value under MM with taxes✓

Trade-off theory of capital structure balances

1. Aonly dividend policy✓
2. Bonly inventory levels✓
3. Ctax benefits of debt against bankruptcy costs✓
4. Donly marketing spend✓

Times interest earned ratio measures

1. Ainventory turnover speed✓
2. Bability to cover interest from operating earnings✓
3. Cequity market capitalization✓
4. Ddividend payout speed✓

Debt capacity is constrained by

1. Acash flow stability, asset tangibility, and industry risk✓
2. BCEO age only✓
3. Clogo design only✓
4. Dnumber of product colors✓