36 Lecture
MGT201
Midterm & Final Term Short Notes
Management of capital structure
Capital structure refers to the way a company finances its operations through a combination of debt and equity. Effective management of capital structure involves balancing the costs and benefits of different sources of funding, determining the
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What is the primary goal of capital structure management? A) To maximize shareholder wealth B) To minimize the cost of capital C) To increase market share D) To decrease financial risk Solution: A) To maximize shareholder wealth
Which of the following is a disadvantage of using debt financing? A) Interest payments are tax-deductible B) It increases financial leverage C) It reduces the cost of capital D) It increases the value of the firm Solution: B) It increases financial leverage
Which of the following represents the ideal capital structure for a company? A) All equity financing B) All debt financing C) A mix of debt and equity financing D) None of the above Solution: C) A mix of debt and equity financing
What is the primary advantage of using equity financing? A) It reduces financial risk B) It provides tax benefits C) It allows for higher leverage D) It doesn't require repayment Solution: D) It doesn't require repayment
What is the optimal debt-to-equity ratio for a company? A) 0.5 B) 1.0 C) 1.5 D) There is no universal optimal ratio Solution: D) There is no universal optimal ratio
Which of the following is an example of external financing? A) Retained earnings B) Issuing bonds C) Selling company assets D) All of the above Solution: B) Issuing bonds
What is the cost of capital? A) The total amount of money a company has available for investment B) The amount of money a company pays for its debt and equity financing C) The rate of return a company expects to earn on its investments D) The amount of money a company owes its creditors Solution: B) The amount of money a company pays for its debt and equity financing
What is financial leverage? A) The use of borrowed funds to finance investments B) The amount of debt a company has C) The degree to which a company uses its assets to generate revenue D) The ratio of a company's debt to equity Solution: A) The use of borrowed funds to finance investments
Which of the following is a factor that can affect a company's cost of debt? A) The company's credit rating B) The level of competition in the market C) The company's product offering D) The company's stock price Solution: A) The company's credit rating
What is the primary disadvantage of using equity financing? A) It increases the company's financial risk B) It results in higher interest payments C) It dilutes existing shareholder ownership D) It requires repayment Solution: C) It dilutes existing shareholder ownership
Subjective Short Notes
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What is capital structure, and why is it important for companies? Answer: Capital structure refers to the way a company finances its operations through a combination of debt and equity. It is important because it impacts a company's cost of capital, financial risk, and overall financial stability.
What are the different types of debt financing that companies can use to fund their operations? Answer: Companies can use a variety of debt financing options, including bank loans, bonds, and other types of debt securities.
How do companies determine their optimal capital structure? Answer: Companies typically analyze a variety of factors, including their cost of capital, risk profile, and market conditions, to determine their optimal capital structure.
What is the role of financial leverage in capital structure management? Answer: Financial leverage refers to the use of borrowed funds to finance investments. It plays a key role in capital structure management because it can impact a company's cost of capital and overall financial stability.
What are the advantages of using debt financing for a company? Answer: Debt financing can offer lower interest rates than equity financing, and interest payments are tax-deductible, resulting in a lower cost of capital for the company.
What are the disadvantages of using debt financing for a company? Answer: Debt financing can increase a company's financial risk, as it requires regular interest payments and eventual repayment of principal.
What are the advantages of using equity financing for a company? Answer: Equity financing doesn't require repayment and doesn't increase a company's financial risk. It can also improve a company's credit rating and provide flexibility in funding future growth.
What are the disadvantages of using equity financing for a company? Answer: Equity financing can dilute existing shareholder ownership and can result in higher costs of capital than debt financing.
How does a company's credit rating impact its cost of debt financing? Answer: A company's credit rating can impact its cost of debt financing because lenders use the rating to assess the company's creditworthiness and default risk.
How can companies optimize their capital structure to maximize shareholder value? Answer: Companies can optimize their capital structure by analyzing their cost of capital, risk profile, and market conditions and balancing the costs and benefits of different sources of funding to maximize shareholder value.