Capital structure MCQ Quiz in தமிழ் - Objective Question with Answer for Capital structure - இலவச PDF ஐப் பதிவிறக்கவும்

The correct answer is Dilution in Equity.

Key PointsDilution in Equity: 

• Equity dilution occurs when a company issues new shares of common stock, which reduces the ownership percentage of existing shareholders. This can occur in situations such as an initial public offering (IPO), a secondary offering, or the issuance of stock options or other equity-based compensation to employees.
• Debt financing, however, does not involve the issuance of new shares of common stock and does not result in dilution of equity. Instead, debt financing involves borrowing money from lenders and agreeing to make regular interest payments and repay the principal amount borrowed within a specified timeframe.

Hence, the correct answer is Dilution in Equity.

The correct option is ​Only (ii), (iii) and (iv)

Key Points

•  working capital referees to the liquidity level of the organization to manage the day-to-day affairs of business
• The form normally finances the working capital in different modes
• Bank finance

​The firm can obtain financial assistance from banks through various means such as overdraft facilities, short-term loans, and cash credit.

• commercial papers

Commercial papers are unsecured promissory notes issued by the firm in order to raise short-term funds from the market, they are typically issued by the large creditworthy firm.

• Factoring

Factoring referees to the sale firms' bills receivable or accounts receivable to the third party at discount, the factor who are collecting payments from the customers.

Hence the correct answer is  ​Only (ii), (iii) and (iv)

The correct option is: Only (i), (ii) and (iv)

Key Points

• Traditional theory suggests that there is an optimal capital structure, balancing the cost of debt and equity to minimize the overall cost of capital.
• Net income theory also supports the concept of an optimal capital structure, with the view that increasing debt lowers the overall cost of capital up to a certain point.
• Net operating income theory rejects the idea of an optimal capital structure, suggesting that the value of a firm is unaffected by its capital structure.

Pecking order theory focuses on the preference hierarchy of financing sources, rather than the optimal capital structure.

Additional Information

• This topic involves theories on how firms balance debt and equity to achieve an optimal structure.
• Visual aids like a diagram illustrating the trade-off between debt and equity financing might help clarify these concepts.

The correct answer is - K_db = (I/NP)(1 - t)

Key Points

• Cost of Irredeemable Debt (After Tax)
  • The cost of irredeemable debt reflects the annual interest obligation on debt, adjusted for the tax shield due to interest being tax-deductible.
  • The formula is: K_db = (I / NP)(1 - t)
  • Where:
    • I = Annual Interest Payable
    • NP = Net Proceeds from Debt Issue
    • t = Tax Rate
  • The formula accounts for the fact that interest expense reduces taxable income, lowering the effective cost of debt to the company.

Additional Information

• Irredeemable Debt
  • Also known as perpetual debt, it has no maturity date and pays a fixed interest indefinitely.
  • Examples include perpetual bonds or debentures with no repayment of principal.
• Importance of After-Tax Cost
  • Interest on debt is a tax-deductible expense, so companies get a tax benefit by using debt financing.
  • The after-tax cost is used in capital budgeting and WACC calculations to reflect the real cost to the firm.
• Incorrect Options Clarified
  • Option 1 (I/P): Ignores tax effect and net proceeds; applicable only before tax.
  • Option 3 (D/P): Relates to preference dividends, not interest on debt.
  • Option 4 (P/I)(1 - t): Inverted and logically incorrect representation of cost.

The correct answer is An optimum plant.

Key Points

•  Under perfect competition, a firm can produce with an optimum plant size where it produces at a minimum efficient scale (MES).
• MES is the level of output where the firm produces at the lowest average cost.
• In perfect competition, there are a large number of buyers and sellers in the market, and no single buyer or seller has any influence over the market price.
• The market price is determined by the forces of supply and demand, and each firm is a price taker, meaning it cannot affect the market price by changing its output level.
• Since the firm cannot affect the market price, it must produce at the lowest possible cost in order to maximize its profits.
• This means that the firm will choose a plant size where it can produce at minimum efficient scale (MES), which is the level of output where the firm produces at the lowest average cost.

Hence, the correct answer is An optimum plant.

The Correct answer is ‘None of the Above’.

 Key PointsCost of capital:

• The cost of capital is the rate of return that a company must achieve in order to justify the cost of a capital project, such as buying new equipment or building a new building.
• The cost of capital includes the cost of both equity and debt, weighted according to the preferred or existing capital structure of the company.

 Important PointsBelow the cost of debt capital: This option is Incorrect Cost of Capital includes the cost of both equity and debt, weighted according to the preferred or existing capital structure of the company.

Equal to the most recent dividend paid to equity shareholders: This option is Incorrect Cost of Capital includes the cost of both equity and debt, weighted according to the preferred or existing capital structure of the company.

Equal to equity shareholders' dividend expectations for the Financial year: This option is Incorrect Cost of Capital includes the cost of both equity and debt, weighted according to the preferred or existing capital structure of the company.

None of the Above: This option is Incorrect Cost of Capital defines the cost of capital is the rate of return that a company must achieve in order to justify the cost of a capital project, such as buying new equipment or building a new building.

The correct answer is Concentration banking

Key Points

•  Concentration banking: A financial institution that serves as the main bank for a certain organization is known as a concentration bank.

• Concentration banking is transferring of funds from a number of bank accounts into an investment account where it can be invested more profitably.

• The Concentration Banking setup is one that businesses utilize to collect or concentrate funds from all regional banks located in several regions into a single bank account.

• Banks usually use concentration accounts in order to make fund transfers, private banking transactions and foreign transactions more easier.

• Concentration accounts combine funds from multiple locations within one consolidated account.

• Some Functions of Concentration banking:
  • Increasing Collection
  • Reducing accounting errors
  • Quick/ timely information etc.

• A large firm operating over a wide geographical area can speed up its collection with the help of concentration banking.

Hence, the correct answer is Concentration banking.

The correct answer is 4.5%.

Key Points

• Dividend Payout Ratio:
  • The dividend payout ratio is the proportion of earnings a company pays to its shareholders in the form of dividends.
  • In this case, the dividend payout ratio is 70%, meaning the company retains 30% of its earnings.
• Step 1: Calculate Retention Ratio:
  • The retention ratio (also known as the plowback ratio) is the proportion of earnings retained in the business.
  • Retention Ratio = 1 - Dividend Payout Ratio
    = 1 - 0.70
    = 0.30
• Step 2: Calculate Growth Rate:
  • The growth rate (g) can be calculated using the formula:
    g = Retention Ratio × Return on Investment (ROI)
  • g = 0.30 × 15%
    = 0.30 × 0.15
    = 0.045 or 4.5%

Additional Information

• Cost of Capital:
  • The cost of capital is the return rate that a company must earn on its investment projects to maintain its market value and attract funds.
  • Though the cost of capital is 12% in this scenario, it does not directly impact the calculation of the growth rate, which is determined by the retention ratio and ROI.
• Significance of Growth Rate:
  • The growth rate represents the rate at which a company's earnings are expected to grow, which is crucial for investors seeking long-term returns.
  • A higher growth rate indicates a company with strong reinvestment opportunities and potential for increased future earnings.

The correct answer is Equity Theory.

Key Points

•  The theory that explains how and why people react when they feel unfairly treated is the "equity theory."
• Equity theory, proposed by J. Stacy Adams, suggests that individuals are motivated by a sense of fairness in their social exchanges.
• According to this theory, people compare their own inputs (such as effort, skills, and time) and outcomes (such as rewards, recognition, and benefits) to those of others in similar situations.
• When they perceive an inequity (either over-reward or under-reward) in the ratio of inputs to outcomes compared to others, it creates a state of tension or motivation to restore perceived equity.
• In summary, equity theory focuses on the idea that individuals strive for fairness and balance in their relationships and work environments, and their reactions are influenced by perceived inequalities in the treatment they receive compared to others.

Long-term capital gains in case of a firm U/S 112 taxed at 20%.

Section 112 of the Income Tax Act

Under Section 112 of the Income Tax Act, an assesses is required to pay a tax at the rate of 20% or 10% after and before indexation respectively on the capital gained by him on long-term capital assets defined under Section 2 (29A) of the IT Act, 1961. All the securities whether listed or not whether shares, debentures, or units of a business trust are applicable under this section.

The deductions under Section VI-A are not provided under Section 112.

Section 112 Exceptions:

1. No tax on gains from Mutual Funds
2. If Section 112A is applicable then Section 112 does not imply
3. Not applicable to Non-Residents of India (NRIs)

As per Section 112A, long-term capital gains arising from the transfer of an equity share, or a unit of an equity-oriented fund or a unit of a business trust shall be taxed at 10% (without indexation) of such capital gains. The tax on capital gains shall be levied in excess of Rs. 1 lakh.

Long-term capital gains arising from the sale of listed securities and exceeds Rs. 1,00,000 (Section 112A);

The cost of acquisitions of a listed equity share acquired by the taxpayer before February 1, 2018, shall be deemed to be the higher of the following:

1. The actual cost of acquisition of such asset; or
2. Lower of following:
   • Fair market value of such shares as of January 31, 2018; or
   • Actual sales consideration accruing on its transfer.