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business
intermediate financial management
Taxmans Fundamentals Of Financial Management 14th Edition R.P. Rustagi - Solutions
Explain briefly, the factors which influence the planning of capital structure in a business firm.[B.Com. (H.), D.U., 2015]
Explain the capital structure decision from the point of view of minimization of risk.
In addition to wealth considerations, what other factors might a firm consider while making capital structure decisions?
Explain the feature of EBIT-EPS analysis, cash flow analysis and valuation models approach to determinations of capital structure.
What is financial distress? Examine the effects of financial distress on the value of the firm.
How the consideration of control affect the composition of capital structure?
If debt is cheaper source of finance, then why every firm is not a 99% debt firm? Enumerate the legal provisions in this respect.
Discuss any five factors relevant in determining the capital structure.
Can a firm have an optimal capital structure? What do you mean by flexibility of capital structure?
What do you mean by appropriate capital structure?Explain with reference to the cash flow analysis.
Write short notes on :(a) Agency cost(b) Projected cash flow analysis
In Pecking Order Theory, the first priority is given to :(a) Fresh Equity,(b) Fresh Loan,(c) Mix of Debt & Equity,(d) Retained Earnings.
Cash flow required during a period to meet the interest and repayment commitments is known as :(a) Debt capacity,(b) Interest Coverage,(c) Debt-service Coverage,(d) Market Value of Debt.
Maximum amount of Debt, a firm can comfortably service is known as :(a) Debt-service Coverage,(b) Debt capacity,(c) Interest charge,(d) Debt Value.
Which of the following may be ignored while designing a capital structure?(a) Profitability,(b) Flexibility,(c) Control Philosophy,(d) Political Stability.
While increasing debt proportion in the capital structure, which one of the following should be considered?(a) Cash flow position,(b) Operating profits,(c) Financial risk,(d) All of the above.
Which of the following is not affected by capital structure?(a) Total tax liability,(b) Return on Equity,(c) Operating Profit,(d) Earnings Per Share.
Agency cost arises due to :(a) Increase in Cost of Production,(b) Hiring more employees,(c) Increase in Debt,(d) Sales decline.
An optimal capital structure is one when the MP of the equity share is :(a) Zero,(b) Maximum,(c) Minimum,(d) Moderate.
Financial Structure refers to(a) All financial resources,(b) Short-term funds,(c) Long-term funds,(d) None of these.
Which of the following is not relevant for optimal capital structure?(a) Flexibility,(b) Solvency,(c) Liquidity,(d) Control.
Which of the following is not considered while designing the capital structure?(a) Size of the company,(b) Tax rate,(c) Location of the plant,(d) Dilution of control.
Capital structure of a firm influences the :(a) Risk of the firm,(b) Return of the Equity Shareholder,(c) Risk but not return,(d) Both (a) and (b).
In order to design an optimal capital structure, a company should strive for :(a) Maximum Debt,(b) Minimum Debt,(c) Minimum WACC,(d) Minimum Cost of Equity.
True or False There is no agency cost of debt financing.
True or False Projected cash flow analysis can be of immense help to financial manager in planning the capital structure.
True or False EBIT-EPS analysis incorporates the risk of the firm in the capital structure analysis.
True or False In general, the preference share capital and debt financing dilute the controlling powers of management.
True or False As debt is generally cheaper than share capital, higher leverage should always be the objective of designing the capital structure.
True or False Any firm should employ as much debt as possible in the overall capitalization.
True or False Debt repayment capacity is an important consideration for designing a capital structure.
True or False Flexibility of capital structure refers to ability of the firm to issue additional equity share capital.
True or False In capital structure analysis, only the financial risk is considered and the total risk of the firm is ignored.
True or False In practice, the capital structure of a firm reflects the management philosophy.
Enumerate the main assumptions of the Traditional Approach to Capital Structure.P8.1 XYZ Manufacturing Co., has a total capitalisation of 10,00,000 and normally earns 1,00,000 (before interest and taxes). The financial manager of the firm wants to take a decision regarding the capital
Enumerate the assumptions of NI Approach. Is there an optimal capital structure as per NI?[B. Com. (H.), D.U. 2010]
The MM hypothesis realistic with respect to capital structure and value of the firm in actual practice ? If not, what are its main weaknesses ? [B. Com. (H.), D.U. 2009]
Comment upon the utility of Net Income Approach of capital structure in real world. [B. Com. (H.), D.U., 2013]
Modigliani and Miller argue that in the absence of taxes, a firm’s market value and the cost of capital remain invariant to the changes in the capital structure. What behavioural justification they give in their hypothesis ?
Explain the Net Operating Income approach to Capital Structure. [B. Com. (H.), D.U., 2013]
Explain with suitable example the arbitrage process of MM approach to achieve the equilibrium level.
How the cost of equity capital behaves in the Traditional theory and MM approach on capital structure?[B. Com. (H.), D.U., 2014]
What is the effect of corporate tax on the value of the firm? How the MM approach incorporates the corporate taxes in the valuation model?
Critically evaluate the NI and NOI approach to capital structure.
Under the Traditional approach to capital structure, what happens to the cost of debt and cost of equity when leverage increases? Describe the behaviour of overall cost of capital.
What are the assumptions and implications of NOI approach? Is there an optimal capital structure as per NOI approach?
What are the assumptions and implications of NI approach? Is there an optimal capital structure as per NI approach?
Explain the Traditional theory of cost of capital and capital structure. [B. Com.(H.), D.U., 2009]
Write short notes on :(a) Home made leverage.(b) Optimal capital structure.(c) Concept of value of the firm.
In MM Model with taxes, where ‘r’ is the interest rate, ‘D’is the total debt and ‘t’ is tax rate, then present value of taxshields would be :(a) r × D × t,(b) r × D,(c) D × t,(d) (D × r)/(1 – t).
Which of the following appearing in the balance sheet, generates tax advantage and hence affects the capital structure decision ?(a) Reserves and Surplus,(b) Long-term debt,(c) Preference Share Capital,(d) Equity Share Capital.
Which of the following is incorrect for value of the firm ?(a) In the initial preposition, MM Model argues that value is independent of the financing mix.(b) Total value of levered and unlevered firms be same otherwise arbitrage will take place.(c) Total value incorporates borrowings by firm but
Which of the following is incorrect for NOI ?(a) k0 is constant,(b) kd is constant,(c) ke is constant,(d) kd & k0 are constant.
A firm has EBIT of 50,000. Market value of debt is 80,000 and overall capitalization rate is 20%. Market value of firm under NOI Approach is :(a) 2,50,000,(b) 1,70,000,(c) 30,000,(d) 1,30,000.
The Traditional Approach to Value of the firm assumes that :(a) There is no optimal capital structure,(b) Value can be increased by judicious use of leverage,(c) Cost of Capital and Capital structure are independent,(d) Risk of the firm is independent of capital structure.
Which of the following is true?(a) Under Traditional Approach, overall cost of capital remains same,(b) Under NI Approach, overall cost of capital remains same,(c) Under NOI Approach, overall cost of capital remains same,(d) None of the above.
Which of the following assumes constant kd and ke ?(a) Net Income Approach,(b) Net Operating Income Approach,(c) Traditional Approach,(d) MM Model.
In Traditional Approach, which one is correct?(a) ke rises constantly,(b) kd decreases constantly,(c) ko decreases constantly,(d) None of the above.
Which of the following argues that the value of levered firm is higher than that of the unlevered firm?(a) Net Income Approach,(b) Net Operating Income Approach,(c) MM Model with taxes,(d) Both (a) and (c).
‘That personal leverage can replace corporate leverage’ is assumed by :(a) Traditional Approach,(b) MM Model,(c) Net Income Approach,(d) Net Operating Income Approach.
‘That there is no corporate tax’ is assumed by :(a) Net Income Approach,(b) Net Operating Income Approach,(c) Traditional Approach,(d) All of these.
In MM Model, irrelevance of capital structure is based on :(a) Cost of Debt and Equity,(b) Arbitrage Process,(c) Decreasing ko,(d) All of the above.
In the Traditional Approach, which one of the following remains constant?(a) Cost of Equity,(b) Cost of Debt,(c) WACC,(d) None of the above.
Which one is true for Net Operating Income Approach?(a) VD = VF – VE,(b) VE = VF + VD,(c) VE = VF – VD,(d) VD = VF + VE.
‘Judicious use of leverage’ is suggested by :(a) Net Income Approach,(b) Net Operating Income Approach,(c) Traditional Approach,(d) All of the above.
NOI Approach advocates that the degree of debt financing is :(a) Relevant,(b) May be relevant,(c) Irrelevant,(d) May be irrelevant.
In Net Operating Income Approach, which one of the following is constant?(a) Cost of Equity,(b) Cost of Debt,(c) WACC & kd,(d) ke and kd.
Which of the following is true of Net Income Approach?(a) VF = VE + VD,(b) VE = VF + VD,(c) VD = VF + VE,(d) VF = VE – VD.
In case of Net Income Approach, when the debt proportion is increased, the cost of debt :(a) Increases,(b) Decreases,(c) Constant,(d) None of the above.
In case of Net Income Approach, the Cost of equity is :(a) Constant,(b) Increasing,(c) Decreasing,(d) None of the above.
Which of the following is true for Net Income Approach?(a) Higher Equity is better,(b) Higher Debt is better,(c) Debt Ratio is irrelevant,(d) None of the above.
True or False In the MM model, the value of the levered firm can be found by first finding out the value of the unlevered firm.
True or False In the basic MM model, leverage does not affect the value of the firm.
True or False MM model is difficult to be applied in practice.
True or False In MM model, personal leverage and corporate leverage are considered as perfect substitute.
True or False MM model provides a behavioural justification of NOI approach.
True or False At optimal capital structure, the ko of the firm is highest.
True or False The traditional approach says that a firm may attain an optimal capital structure.
True or False The NOI approach says that there is no optimal capital structure.
True or False In NOI approach, kd and ko are taken as constant.
True or False In NI approach, the ko falls as the degree of leverage is increased.
True or False In NI approach, the ke is assumed to be same and constant.
True or False The ultimate conclusions of NI approach and the NOI approach are same.
True or False There is no difference of opinion on the relationship between capital structure and value of the firm.
True or False The equity shareholders get the residual profit of the firm.
True or False The financing decision affects the total operating profits of the firm.
It has a tax rate of 30% and debt financing can be arranged as follows : Up to 1,00,000 @ 10%; from 1,00,000 to 5,00,000 @ 14%; and over 5,00,000 @ 18%. The three financing plans and the corresponding EBIT are as follows :Plan I: 1,00,000 debt; expected EBIT 2,50,000 Plan II: 3,00,000
“Trading on equity is resorted with a view to decrease EPS”. Comment.P6.1 A firm requires total capital funds of 25 lacs and has two options : All equity; and Half equity and Half 15%debt. The equity share can be currently issued at 100 per share. The expected EBIT of the company is
How the indifference level of EBIT be calculated in case of financing plans involving a pure equity financing and a plan comprising of equity and debt financing?
Explain the mechanism of determining the indifference level of EBIT under different combinations of optimal financing plans.
Examine the effects of change in EBIT of a firm on the EPS under (i) same capital structure and (ii) different capital structure.
What are the shortcomings, if any, of the EBIT-EPS analysis?
Explain the EBIT-EPS analysis of capital structure. Show graphically, the financial break-even level.
Explain and illustrate the in difference level of EBIT
What do you mean by financial break-even? How is it calculated?
Explain EBIT-EPS analysis. What is indifference level of EBIT? Show graphically.
What is EBIT-EPS Analysis? How is it different from leverage analysis? [B.Com.(H), D.U., 2013]
Financial break-even level of EBIT is :(a) Intercept at Y-axis(b) Intercept at X-axis(c) Slope of EBIT-EPS line(d) None of the above.
Between two capital plans, if expected EBIT is more than indifference level of EBIT, then(a) Both plans be rejected,(b) Both plans are good,(c) One is better than other,(d) None of the above.
For a constant EBIT, if the debt level is further increased then(a) EPS will always increase(b) EPS may increase(c) EPS will never increase(d) None of the above.
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