Capital Structure Theories Quiz

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Questions and Answers

What is the meaning of capital structure?

The total assets of a company
The number of shareholders in a company
The combination of capitals from different sources of finance (correct)
The annual revenue of a company

Which theory suggests that the value of a firm is not affected by its capital structure?

Modigliani and Miller (MM) Approach (correct)
Trade-off Theory
Pecking Order Theory
Net Income Approach

What is the EBIT-EPS analysis used to analyze?

The market share of a company
The relationship between the performance of a company and its impact on the earnings of the shareholders (correct)
The debt-to-equity ratio of a company
The liquidity position of a company

What does the Pecking Order Theory suggest about a company's preference for financing?

<p>Companies prefer internal financing, then debt, and finally equity as a last resort (D)</p> Signup and view all the answers

What does overcapitalization of a company lead to?

<p>Decreased return on investment (C)</p> Signup and view all the answers

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.

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Description

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.