Financing Decisions - Capital Structure

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. 30 original practice MCQs, 2 marks each. Practice and separate-test stems differ. Standalone drills across the chapter, with a separate case-based test pack.

Original practice, not official ICAI questions or suggested answers. Scores are temporary and not synced to Study Hub. Contract/current-rule/accounting/tax boundaries are included in the review pack.

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FM-C05-P001 · 2 marks

No-tax NI: EBIT 30, interest 10, Ke 20%. Equity market value?

A. 200 lakh firm value. B. 100 lakh. C. 20 lakh earnings only. D. 150 lakh ignoring interest.

Explanation

Correct answer B: 100 lakh.

(30-10)/.2=100.

FM-C05-P002 · 2 marks

Same NI facts, debt 100. Total firm value?

A. 200 lakh. B. 150 lakh. C. 100 lakh equity only. D. 300 lakh.

Explanation

Correct answer A: 200 lakh.

S 100+D 100.

FM-C05-P003 · 2 marks

No-tax EBIT 30, total market value 200. Overall cost?

A. 15%. B. 10% coupon only. C. 20% equity cost only. D. 30%.

Explanation

Correct answer A: 15%.

30/200=.15.

FM-C05-P004 · 2 marks

NI leverage benefit depends on which simplification?

A. Distress costs necessarily zero in practice. B. Overall cost fixed by definition. C. Equity cost always rises to offset debt. D. Debt and equity costs stay constant as leverage changes.

Explanation

Correct answer D: Debt and equity costs stay constant as leverage changes.

Model assumptions, not a practical guarantee.

FM-C05-P005 · 2 marks

NOI EBIT 24, Ko 12%. Firm value?

A. 288 lakh. B. 200 lakh. C. 100 lakh. D. 24 lakh.

Explanation

Correct answer B: 200 lakh.

24/.12.

FM-C05-P006 · 2 marks

NOI firm value 200, debt 80. Equity value?

A. 280 lakh. B. 200 lakh. C. 120 lakh. D. 80 lakh.

Explanation

Correct answer C: 120 lakh.

V-D.

FM-C05-P007 · 2 marks

NOI EBIT 24, debt 80 at 8%, equity 120. Ke?

A. 20%. B. 14.6667%. C. 8%. D. 12% overall rate.

Explanation

Correct answer B: 14.6667%.

(24-6.4)/120.

FM-C05-P008 · 2 marks

Which pattern matches the traditional approach?

A. WACC can first fall then rise as leverage increases. B. Every source cost always fixed. C. WACC must always fall without limit. D. Every firm has the same optimum ratio.

Explanation

Correct answer A: WACC can first fall then rise as leverage increases.

Source risk costs can offset early debt benefits.

FM-C05-P009 · 2 marks

Ku 12%, Kd 8%, D/S=.75. Levered Ke?

A. 10.2857% using wrong weight. B. 15%. C. 20%. D. 12%.

Explanation

Correct answer B: 15%.

12+(12-8)x.75.

FM-C05-P010 · 2 marks

No-tax MM with equivalent business risk predicts what?

A. Equity cost must fall. B. A universal maximum-debt instruction. C. Guaranteed real-world tax gains. D. Unchanged overall cost despite higher equity cost.

Explanation

Correct answer D: Unchanged overall cost despite higher equity cost.

No-tax perfect-market model separates financial and business risk.

FM-C05-P011 · 2 marks

EBIT 40, t 30%, Ku 14%, perpetuity. Unlevered value?

A. 230 lakh levered value. B. 285.7143 lakh using pre-tax EBIT. C. 28 lakh. D. 200 lakh.

Explanation

Correct answer D: 200 lakh.

40 x.7/.14.

FM-C05-P012 · 2 marks

Permanent debt 100, full shield t 30%, Vu 200. Model VL?

A. 300 lakh. B. 230 lakh. C. 200 lakh. D. 130 lakh equity.

Explanation

Correct answer B: 230 lakh.

200+.3 x 100.

FM-C05-P013 · 2 marks

VL 230, debt 100. Remaining equity value?

A. 230 lakh. B. 30 lakh. C. 330 lakh. D. 130 lakh.

Explanation

Correct answer D: 130 lakh.

VL-D.

FM-C05-P014 · 2 marks

Ku 14%, Kd 8%, t 30%, D 100/S 130. Specified consistent tax-MM Ke?

A. 17.2308%. B. 14%. C. 16.6087% from conflicting page 18 expression. D. 18.6154% omitting tax factor.

Explanation

Correct answer A: 17.2308%.

14+6 x.7 x 100/130; page 27 and earnings/value reconcile.

FM-C05-P015 · 2 marks

After-tax operating cash 28, levered value 230. WACC?

A. 12.1739%. B. 14%. C. 8%. D. 17.2308% equity only.

Explanation

Correct answer A: 12.1739%.

28/230.

FM-C05-P016 · 2 marks

Post repurchase equity 130 plus 100 cash paid, versus original equity 200. Model shareholder gain?

A. No gain in every tax model. B. Gain 130. C. 30 lakh, conditional on supplied model. D. Loss 70 ignoring distribution.

Explanation

Correct answer C: 30 lakh, conditional on supplied model.

130+100-200=30.

FM-C05-P017 · 2 marks

10% of levered equity 120 and debt 100 costs what?

A. 10 lakh ignoring equity. B. 24 lakh cost of other firm. C. 22 lakh. D. 12 lakh ignoring debt.

Explanation

Correct answer C: 22 lakh.

12+10; both claims replicate exposure.

FM-C05-P018 · 2 marks

Sell U stake 24; replicated L equity/debt costs 22. Uninvested surplus?

A. 2 lakh. B. 22 lakh. C. 46 lakh. D. A guaranteed extra annual income 2.

Explanation

Correct answer A: 2 lakh.

Cash surplus not annual income absent reinvestment terms.

FM-C05-P019 · 2 marks

Base 200, PV shield 30, PV distress/agency 12. Model value?

A. 188 ignoring shield. B. 230 ignoring costs. C. 218 lakh. D. 242 adding costs.

Explanation

Correct answer C: 218 lakh.

200+30-12.

FM-C05-P020 · 2 marks

Need 40, internal 12, feasible debt 20. Residual finance need?

A. 40. B. 28 after ignoring capacity. C. 0 because debt unlimited. D. 8 lakh.

Explanation

Correct answer D: 8 lakh.

40-12-20; hierarchy does not remove constraints.

FM-C05-P021 · 2 marks

Founder 60 votes of 100; issue 50 none subscribed. New proportion?

A. 20%. B. 40%. C. 60%. D. 50%.

Explanation

Correct answer B: 40%.

60/150.

FM-C05-P022 · 2 marks

Tax 30%, EBIT 12, no interest, 10 lakh shares. EPS?

A. Rs 0.84. B. Rs 0.9333 other plan. C. Rs 8.4. D. Rs 1.20 before tax.

Explanation

Correct answer A: Rs 0.84.

12 x.7/10.

FM-C05-P023 · 2 marks

Tax 30%, EBIT 12, interest 4, 6 lakh shares. EPS?

A. Rs 0.9333. B. Rs 0.4667 low EBIT. C. Rs 0.84. D. Rs 1.3333 before tax.

Explanation

Correct answer A: Rs 0.9333.

8 x.7/6.

FM-C05-P024 · 2 marks

A 10 lakh shares/no interest; B 6 lakh shares/interest 4; same positive-EBT tax regime. EPS crossover EBIT?

A. 12 lakh forecast. B. 4 lakh financial BEP. C. 10 lakh. D. 20 lakh MPS crossover for other multiples.

Explanation

Correct answer C: 10 lakh.

X/10=(X-4)/6.

FM-C05-P025 · 2 marks

Interest 4, preference 1.5, t 25%. Financial BEP?

A. 5.5 without gross-up. B. 6 lakh. C. 10. D. 4.5.

Explanation

Correct answer B: 6 lakh.

4+1.5/.75.

FM-C05-P026 · 2 marks

A EPS.84/P-E 12; B EPS.933333/P-E 9. Higher supplied MPS?

A. B because EPS alone higher. B. A and B prices guaranteed future quotes. C. A: 10.08 versus B 8.40. D. Both same MPS.

Explanation

Correct answer C: A: 10.08 versus B 8.40.

Multiply by supplied risk-sensitive multiples.

FM-C05-P027 · 2 marks

Same shares and tax; same after-tax fixed charges. EPS indifference?

A. One unique crossover necessarily. B. Only EBIT zero. C. Never equal. D. Every admissible EBIT in that linear regime.

Explanation

Correct answer D: Every admissible EBIT in that linear regime.

Identical slopes and intercepts.

FM-C05-P028 · 2 marks

EBIT 4, interest 6, 8 lakh shares; no refund on losses. EPS?

A. Rs 0.25. B. Zero. C. Rs-0.1875 inventing 25% refund. D. Rs-0.25.

Explanation

Correct answer D: Rs-0.25.

EBT-2, tax 0, divide 8.

FM-C05-P029 · 2 marks

Interest 8, t 30%, 3 years, discount 8%. PV shield?

A. 7.2 undiscounted total. B. About 6.1850 lakh. C. 100 lakh principal. D. 30 lakh perpetual tD.

Explanation

Correct answer B: About 6.1850 lakh.

2.4 x PVAF(8%, 3).

FM-C05-P030 · 2 marks

PAT 6.75, depreciation 2, principal 8, additional investment 4. Cash gap?

A. Positive 6.75 guarantees coverage. B. No principal affects cash. C. 3.25 lakh shortfall. D. 4.75 surplus.

Explanation

Correct answer C: 3.25 lakh shortfall.

6.75+2-8-4=-3.25.