Which of the following best defines the cost of capital?
a) The cost incurred in acquiring assets
b) The required rate of return for investors
c) The total amount of capital used in a business
d) The expense of running daily operations
Which of the following is included in the cost of capital calculation?
a) Debt cost
b) Equity cost
c) Preferred stock cost
d) All of the above
The weighted average cost of capital (WACC) considers:
a) Only equity financing
b) Only debt financing
c) Both debt and equity financing
d) Only short-term financing
Which of the following sources of finance generally has the lowest cost of capital?
a) Retained earnings
b) Equity shares
c) Debt financing
d) Preferred stock
Which of the following increases a company’s cost of equity?
a) Increased risk perception
b) Reduced dividend payouts
c) Lower return expectations
d) Decreased financial leverage
Which component of capital structure involves ownership rights?
a) Debt financing
b) Equity financing
c) Trade credit
d) Bank loan
Which factor does NOT affect the cost of capital?
a) Inflation rate
b) Risk-free interest rate
c) Total assets of the firm
d) Market risk premium
Which of the following is an advantage of debt financing?
a) No fixed interest obligation
b) Tax deductibility of interest
c) No need for collateral
d) No repayment obligation
Which capital structure theory suggests an optimal mix of debt and equity exists?
a) Net Operating Income Approach
b) Traditional Approach
c) Modigliani & Miller Proposition I
d) Arbitrage Pricing Theory
The Modigliani-Miller Theorem states that in a perfect market:
a) Capital structure affects firm value
b) Dividend policy is irrelevant
c) Debt has no impact on firm value
d) Equity is the only source of financing
Which of the following does NOT influence a company’s capital structure?
a) Industry norms
b) Cost of debt
c) CEO’s salary
d) Business risk
The cost of retained earnings is generally equal to:
a) Cost of debt
b) Cost of new equity
c) Risk-free rate
d) Cost of common equity
What is the primary purpose of capital structure decisions?
a) Maximizing profits
b) Minimizing operational expenses
c) Reducing capital costs and maximizing shareholder wealth
d) Increasing total assets
Which factor directly affects the cost of debt?
a) Dividend policy
b) Interest rates
c) Advertising expenses
d) Inventory turnover
Which source of financing is considered the most expensive?
a) Debt
b) Retained earnings
c) Common equity
d) Preferred stock
The debt-to-equity ratio is a measure of:
a) Profitability
b) Liquidity
c) Financial leverage
d) Market share
Which is NOT a type of capital in capital structure?
a) Debt
b) Equity
c) Retained earnings
d) Current liabilities
If a company increases its financial leverage, what happens to its cost of equity?
a) Increases
b) Decreases
c) Remains constant
d) Becomes negative
Which type of firm is likely to have a higher debt-to-equity ratio?
a) High-risk startups
b) Stable manufacturing companies
c) Tech startups
d) Non-profit organizations
Which of the following will reduce the cost of equity?
a) Increased perceived risk
b) Decreasing dividends
c) Higher retained earnings
d) Decreasing financial leverage
Which of the following is NOT a method for calculating the cost of equity?
a) Dividend Discount Model
b) Capital Asset Pricing Model
c) Weighted Average Cost of Capital
d) Bond Yield Plus Risk Premium
What happens to WACC if a firm issues more debt, assuming no change in risk?
a) Increases
b) Decreases
c) Remains the same
d) Becomes zero
What is the relationship between leverage and financial risk?
a) Higher leverage increases financial risk
b) Lower leverage increases financial risk
c) No relationship exists
d) Financial risk is independent of leverage
Which of the following is an example of equity financing?
a) Issuing bonds
b) Bank loans
c) Issuing common stock
d) Trade credit
Which factor does NOT directly affect the capital structure decision?
a) Market conditions
b) Tax laws
c) Customer preferences
d) Growth opportunities
An optimal capital structure balances:
a) Fixed and variable costs
b) Debt and equity financing
c) Revenue and expenses
d) Short-term and long-term liabilities
What does a high degree of financial leverage indicate?
a) Low fixed costs
b) High reliance on debt financing
c) High profitability
d) No dividends
A company that funds its operations entirely with retained earnings has:
a) Zero financial leverage
b) High cost of capital
c) No capital structure
d) Unlimited debt financing
