5 Questions
What is the meaning of capital structure?
The combination of capitals from different sources of finance
Which theory suggests that the value of a firm is not affected by its capital structure?
Modigliani and Miller (MM) Approach
What is the EBIT-EPS analysis used to analyze?
The relationship between the performance of a company and its impact on the earnings of the shareholders
What does the Pecking Order Theory suggest about a company's preference for financing?
Companies prefer internal financing, then debt, and finally equity as a last resort
What does overcapitalization of a company lead to?
Decreased return on investment
Study Notes
Capital Structure
- Capital structure refers to the mix of debt and equity used by a company to finance its operations and investments.
Capital Structure Theories
- The Modigliani-Miller Theory suggests that the value of a firm is not affected by its capital structure, assuming no taxes and perfect capital markets.
EBIT-EPS Analysis
- EBIT-EPS analysis is used to analyze the effect of different capital structures on a company's earnings per share (EPS).
Financing Preferences
- The Pecking Order Theory suggests that companies prefer internal financing, followed by debt financing, and lastly equity financing.
Overcapitalization
- Overcapitalization of a company leads to a surplus of capital, which can result in inefficient use of resources and decreased profitability.
Test your knowledge of capital structure theories and concepts with this quiz on Chapter 5 financing decisions. Explore the significance of capital structure and delve into theories such as Net Income Approach, Traditional Approach, Modigliani and Miller (MM) Approach, and more. Perfect for finance students and professionals looking to deepen their understanding of capital structure decisions.
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