MCQs on Capital Structure

Capital Structure is a combination of financial instruments like equity shares, preference shares, long-term loans, debentures, bonds or retained earnings that a business uses to raise funds for its operations. These long-term options help firms carry out their economic activities to generate profits.

Below are some multiple-choice questions and answers on Capital Structure to help students understand the topic:

1. Which of these is not a part of Capital Structure?
   1. Equity Shares
   2. Debentures
   3. Short-term borrowings
   4. Bonds

Answer: c

2. Capital Structure refers to which of the following options:
   1. Current assets and current liabilities
   2. Shareholders equity
   3. Long term debt, preferred stock and common stock options
   4. None of the above

Answer: c

3. The main aim of capital structure is to:
   1. Maximise owner’s return and minimise the cost of capital
   2. Maximise owner’s return and maximise the cost of capital
   3. Minimise owner’s return and minimise the cost of capital
   4. Minimise owner’s return and maximise the cost of capital

Answer: a

4. The process of financing the assets of a business is known as:
   1. Asset Structure
   2. Owners Structure
   3. Financial Structure
   4. Capital Structure

Answer: c

5. Capital Structure is an optimal mix of which one of the following options:
   1. Sales and profits
   2. Debt and equity
   3. Current assets and fixed assets
   4. None of the above

Answer: b

6. Capital structure ______________ financial structure
   1. Is a part of
   2. Is not a part of
   3. Is the same as
   4. Is different from

Answer: a

7. To get a broad idea of the risk profile of a business, one should look at their ________
   1. Capital structure
   2. Dividend policy
   3. Profit and loss statement
   4. None of the above

Answer: a

8. Capital Structure is a part of ___________:
   1. The asset side of a balance sheet
   2. The liability side of a balance sheet
   3. The Trial Balance
   4. None of the above

Answer: b

9. Which of the following options is a part of the Capital Structure of a company?
   1. Short-term borrowings
   2. Accounts payable
   3. Equity shares
   4. None of the above

Answer: c

10. Which of the above factors helps to determine the capital structure of a firm?
    1. Government policies
    2. Degree of Control
    3. Cost of capital
    4. All of the above

Answer: d

11. In an organisation, the shareholders’ wealth is represented by:
    1. The salary paid to employees
    2. The market price of a share
    3. The book value of a firm’s assets
    4. None of the above

Answer: b

12. The market price of an equity share is determined by:
    1. The president of a company
    2. The board of directors
    3. Buyers and sellers of those shares
    4. The stock exchange where those shares are getting traded

Answer: c

13. The price at which a bond gets traded at a stock exchange is known as:
    1. Maturity Value
    2. Market Value
    3. Face Value
    4. Redemption Value

Answer: b

14. ___________ and ____________ are two financial instruments that carry a fixed rate of interest and they have to be paid off regardless of whether the firm earns revenue or not.
    1. Equity Shares, Preference Shares
    2. Equity Shares, Debentures
    3. Bonds, Debentures
    4. Equity Shares, Bonds

Answer: c

15. Which of the following methods should a company use to improve (lower) its debt to equity ratio?
    1. Buy common stock
    2. Shift long-term debt to short term debt
    3. Borrow more
    4. Shift short-term debt to long-term debt

Answer: a

16. The claims by preferred shareholders on a firm’s assets and income come ________ those of ordinary shareholders and ________ those of creditors.
    1. Before; also before
    2. After; after
    3. Before; after
    4. After; before

Answer: c

17. Which of the following options is an example of marketable securities?
    1. Long-term equity securities
    2. Long-term debt instruments
    3. Short-term debt instruments
    4. Short-term equity securities

Answer: c

18. Which of the following options is false?
    1. The cost of equity capital is lower than the cost of debt before taxes
    2. The cost of equity capital is very difficult to estimate
    3. The cost of equity capital is the minimum rate that a business should earn on the part of investment financed by equity
    4. None of the above

Answer: a

19. The equity shares of a company must give a higher return than debt because:
    1. Bonds require a market premium
    2. Demand for equity shares is greater than bonds
    3. Demand for equity shares is lesser than bonds
    4. Equity shares involve more systematic risk

Answer: d

20. Which of these options, apart from cash, are instruments to distribute profits to shareholders?
    1. Stock purchase
    2. Bonus shares
    3. Stock split
    4. All of the above

Answer: d

Also See:

• Difference between Capital Structure and Financial Structure
• Differences between Debt and Equity Capital