Master Capital Structure Determinants: Enhance Corporate Finance Decision-Making

Question 1

Which of the following is not a determinant of a firm's capital structure?

Accepted Answer

Tax regulations

Answer

Industry characteristics

Answer

Growth opportunities

Answer

Risk tolerance

Question 2

A firm operating in a highly competitive industry with low growth prospects would likely have a:

Accepted Answer

Low debt-to-equity ratio

Answer

High debt-to-equity ratio

Answer

Balanced mix of debt and equity

Answer

Zero debt financing

Question 3

Which of the following is an advantage of issuing debt?

Accepted Answer

Tax savings

Answer

Lower interest rates

Answer

Reduced financial flexibility

Answer

Increased risk of bankruptcy

Question 4

Which of the following is not a factor considered when assessing a firm's risk tolerance?

Accepted Answer

Employee satisfaction

Answer

Industry volatility

Answer

Cash flow stability

Answer

Asset specificity

Question 5

Which of the following is a benefit of issuing equity financing?

Accepted Answer

Increased financial flexibility

Answer

Lower cost of capital

Answer

Improved credit rating

Answer

Reduced risk of bankruptcy

Question 6

A firm with substantial fixed assets is likely to:

Accepted Answer

Issue more debt

Answer

Issue less debt

Answer

Avoid issuing debt

Answer

Maintain a balanced capital structure

Question 7

Which of the following is NOT a potential advantage of debt financing?

Accepted Answer

Reduced risk of financial distress

Answer

Tax benefits

Answer

Lower cost of capital

Answer

Enhanced financial flexibility

Question 8

Companies in industries with high fixed costs are expected to have:

Accepted Answer

High debt ratios

Answer

Low debt ratios

Answer

Stable debt ratios

Answer

Fluctuating debt ratios

Question 9

What is a potential benefit of debt financing?

Accepted Answer

Tax shield

Answer

Enhanced financial flexibility

Answer

Reduced cost of capital

Answer

Elimination of financial risk

Question 10

Companies with substantial growth opportunities tend to:

Accepted Answer

Issue more equity

Answer

Issue more debt

Answer

Maintain a stable capital structure

Answer

Reduce their leverage

Question 11

Which type of firm typically has the highest debt ratio?

Accepted Answer

Electric utility

Answer

Tech startup

Answer

Manufacturing company

Answer

Retail store

Question 12

The primary goal of capital structure optimization is to:

Accepted Answer

Maximize firm value

Answer

Maximize earnings per share

Answer

Minimize the cost of capital

Answer

Minimize risk

Question 13

True or False: Risk-averse companies are likely to rely more heavily on debt financing.

Accepted Answer

False

Answer

True

Question 14

Which metric measures a firm's financial leverage?

Accepted Answer

Debt-to-equity ratio

Answer

Interest coverage ratio

Answer

Current ratio

Answer

Quick ratio

Question 15

Who typically makes capital structure decisions?

Accepted Answer

Board of directors

Answer

Financial analysts

Answer

Investment bankers

Answer

Creditors

Question 16

Which of the following comprises the key determinants that influence a firm's optimal capital structure?

Accepted Answer

Industry characteristics, growth opportunities, and risk tolerance

Answer

Management's financial philosophy, market conditions, and government regulations

Answer

Debt covenants, independent directors, and stock options for management

Answer

Operating leverage, tax deductibility of interest payments, and cost of capital

Question 17

A firm operating in a highly volatile industry is likely to prefer a capital structure with:

Accepted Answer

A lower debt ratio to reduce financial risk

Answer

A higher debt ratio to take advantage of tax savings

Answer

A higher equity ratio to minimize dilution of ownership

Answer

An unchanged debt ratio as industry volatility has no impact on capital structure

Question 18

Which of the following sectors typically exhibits a high debt ratio?

Accepted Answer

Utilities

Answer

Technology

Answer

Healthcare

Answer

Retail

Question 19

A firm with a higher risk tolerance is more likely to:

Accepted Answer

Have a higher debt ratio

Answer

Have a lower debt ratio

Answer

Have a target debt ratio

Answer

Eliminate all debt financing

Question 20

A firm that issues more debt is increasing its:

Accepted Answer

Financial leverage

Answer

Operating leverage

Answer

EBIT

Answer

ROE

Question 21

Which of the following is not a potential disadvantage of debt financing?

Accepted Answer

Increased flexibility

Answer

Increased interest payments

Answer

Bankruptcy risk

Answer

Agency costs

Question 22

The optimal capital structure for a firm is the one that:

Accepted Answer

Balances the benefits and costs of debt and equity financing

Answer

Maximizes the firm's market value

Answer

Minimizes the firm's cost of capital

Answer

Maximizes the firm's debt ratio

Question 23

A capital structure that heavily relies on debt financing is likely to result in:

Accepted Answer

Higher financial risk

Answer

Lower financial risk

Answer

Unchanged financial risk

Answer

Optimal financial risk

Question 24

Which of the following is NOT a primary determinant of a firm's capital structure?

Accepted Answer

Financial Leverage

Answer

Industry Characteristics

Answer

Growth Potential

Answer

Risk Tolerance

Question 25

Which factor is NOT a primary determinant of a firm's capital structure?

Accepted Answer

State of the economy

Answer

Growth potential

Answer

Management's risk tolerance

Answer

Tax regulations

Question 26

Which statement accurately describes risk tolerance in relation to capital structure?

Accepted Answer

Firms with high risk tolerance tend to use more debt financing

Answer

Firms with low risk tolerance prefer equity financing

Answer

Risk tolerance has no bearing on capital structure decisions

Answer

All firms have the same risk tolerance

Question 27

How does firm size generally correlate with capital structure?

Accepted Answer

Larger firms tend to have higher debt-to-equity ratios

Answer

Smaller firms tend to have higher debt-to-equity ratios

Answer

Firm size has no relationship with capital structure

Answer

The relationship between firm size and debt-to-equity ratio is inconsistent

Question 28

Which of the following is NOT a primary determinant of a firm's capital structure?

Accepted Answer

Management preferences

Answer

Industry characteristics

Answer

Growth opportunities

Answer

Risk tolerance

Question 29

A firm with a high risk tolerance is likely to have a:

Accepted Answer

Higher debt ratio

Answer

Lower debt ratio

Answer

Same debt ratio as a firm with low risk tolerance

Answer

Debt ratio that varies depending on other factors

Question 30

Which of the following is not a determinant of a firm's capital structure?

Accepted Answer

Company ownership

Answer

Industry characteristics

Answer

Growth opportunities

Answer

Risk tolerance

Question 31

Which industry would you expect to have the highest debt-to-equity ratio on average?

Accepted Answer

Utilities

Answer

Technology

Answer

Retail

Answer

Manufacturing

Question 32

Which of the following is NOT an advantage of debt financing?

Accepted Answer

Financial distress

Answer

Tax shields

Answer

Increased financial flexibility

Answer

Lower cost of capital

Question 33

A firm with a high risk tolerance is likely to have a:

Accepted Answer

Aggressive capital structure

Answer

Conservative capital structure

Answer

Balanced capital structure

Answer

Variable capital structure

Question 34

A firm's capital structure is typically considered to be a:

Accepted Answer

Strategic decision

Answer

Operational decision

Answer

Tactical decision

Answer

Reactive decision

Question 35

A firm with a low debt-to-equity ratio is considered to have:

Accepted Answer

Low financial leverage

Answer

High financial leverage

Answer

Balanced financial leverage

Answer

Variable financial leverage

Question 36

Which of the following is **NOT** a primary factor that directly influences a firm's capital structure?

Accepted Answer

Product demand

Answer

Management's risk tolerance

Answer

Growth opportunities

Answer

Government regulations

Question 37

A firm with a relatively high debt-to-equity ratio is generally considered to be:

Accepted Answer

Potentially financially unstable

Answer

More financially stable

Answer

Less financially stable

Answer

Moderately financially stable

Question 38

Which of the following is **not** a major factor influencing a firm's capital structure?

Accepted Answer

Government regulations

Answer

Industry characteristics

Answer

Risk tolerance

Answer

Growth opportunities

Question 39

Firms with significant growth opportunities generally:

Accepted Answer

Favor equity financing.

Answer

Avoid external financing.

Answer

Maintain a balanced capital structure.

Answer

Favor debt financing.

Question 40

Risk tolerance in capital structure refers to:

Accepted Answer

A firm's ability to manage financial risk.

Answer

A firm's compliance with accounting standards.

Answer

A firm's commitment to social responsibility.

Answer

A firm's desire to maximize profits.

Question 41

The trade-off theory of capital structure suggests that:

Accepted Answer

There is an optimal balance between debt and equity that minimizes the firm's cost of capital.

Answer

Firms should always use the highest possible level of debt.

Answer

Firms should always use the lowest possible level of debt.

Question 42

Which of the following is **not** a determinant of a firm's optimal capital structure?

Accepted Answer

Political stability

Answer

Tax rates

Answer

Industry characteristics

Answer

Growth prospects

Question 43

A potential consequence of excessive debt financing is:

Accepted Answer

Financial distress.

Answer

Improved liquidity.

Answer

Increased profitability.

Answer

Enhanced growth opportunities.

Question 44

The agency costs of debt refer to:

Accepted Answer

Costs that arise due to conflicts of interest between shareholders and creditors.

Answer

Costs associated with raising debt financing

Answer

Costs related to the maintenance of debt obligations

Question 45

A firm with high growth potential and a low appetite for risk is likely to rely more heavily on:

Accepted Answer

Equity financing

Answer

Internal financing

Answer

Venture capital

Answer

Debt financing

Question 46

Which of the following industries is typically associated with a higher proportion of debt financing in its capital structure?

Accepted Answer

Utilities

Answer

Retail

Answer

Healthcare

Answer

Technology

Question 47

The target capital structure of a firm refers to:

Accepted Answer

The optimal mix of debt and equity financing that minimizes the firm's weighted average cost of capital (WACC)

Answer

The actual mix of debt and equity financing that the firm currently has

Question 48

A firm's debt-to-equity ratio is calculated as:

Accepted Answer

Total debt divided by total equity

Answer

Total debt plus total equity divided by total assets

Answer

Total equity divided by total debt

Answer

Total equity minus total debt divided by total assets

Question 49

Which of the following is a potential cost of maintaining a higher debt-to-equity ratio?

Accepted Answer

Higher interest expenses

Answer

Increased earnings per share

Answer

Reduced tax liability

Answer

Improved credit rating

Question 50

The trade-off theory of capital structure suggests that:

Accepted Answer

As a firm increases its debt-to-equity ratio, its cost of debt will decrease but its cost of equity will increase

Answer

As a firm increases its debt-to-equity ratio, its cost of debt and cost of equity will both decrease