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Questions and Answers
What is the meaning of capital structure?
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?
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?
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?
What does the Pecking Order Theory suggest about a company's preference for financing?
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What does overcapitalization of a company lead to?
What does overcapitalization of a company lead to?
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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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