Capital Structure MCQs 2026

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

1. A zero leverage because equity exists ✓
2. B moderate leverage with greater equity buffer for creditors ✓
3. C leverage determined solely by inventory turnover ✓
4. D debt ratio irrelevant to financial risk ✓

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

1. A elevated fixed financial obligations increasing EPS volatility ✓
2. B zero leverage because equity exists ✓
3. C leverage determined solely by inventory turnover ✓
4. D debt ratio irrelevant to financial risk ✓

Financial distress costs include

1. A only accounting depreciation ✓
2. B only dividend taxes ✓
3. C only stock split costs ✓
4. D legal fees, lost customers, and managerial distraction ✓

Homemade leverage concept in MM means

1. A firms cannot issue debt ✓
2. B banks prohibit personal loans ✓
3. C investors can replicate firm leverage personally ✓
4. D equity cannot be traded ✓

Optimal capital structure minimizes

1. A total assets always ✓
2. B number of employees ✓
3. C weighted average cost of capital ✓
4. D marketing budget ✓

Debt capacity is constrained by

1. A cash flow stability, asset tangibility, and industry risk ✓
2. B CEO age only ✓
3. C logo design only ✓
4. D number of product colors ✓

Times interest earned ratio measures

1. A inventory turnover speed ✓
2. B ability to cover interest from operating earnings ✓
3. C equity market capitalization ✓
4. D dividend payout speed ✓

Trade-off theory of capital structure balances

1. A only dividend policy ✓
2. B only inventory levels ✓
3. C tax benefits of debt against bankruptcy costs ✓
4. D only marketing spend ✓

Interest tax shield from debt

1. A increases taxable income ✓
2. B eliminates need for equity ✓
3. C is irrelevant under any tax system ✓
4. D reduces corporate tax and can increase firm value under MM with taxes ✓

Modigliani-Miller Proposition I without taxes states

1. A debt always increases value ✓
2. B equity is always cheaper than debt ✓
3. C firm value is independent of capital structure in perfect markets ✓
4. D WACC increases with leverage linearly ✓

Financial leverage magnifies

1. A operating fixed costs only ✓
2. B return volatility to equity holders ✓
3. C raw material prices only ✓
4. D employee count only ✓

Capital structure refers to

1. A product mix in retail ✓
2. B geographic market mix ✓
3. C mix of debt and equity financing a firm employs ✓
4. D inventory classification only ✓