Financing Decisions - Capital Structure

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. 30 original test MCQs, 2 marks each. Practice and separate-test stems differ. T001-T010 use one shared case below; T011-T030 stand alone.

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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Banyan Instruments: shared case for T001-T010

Shared case: Banyan Instruments, T001-T010 All annual financial amounts are Rs lakh; ordinary share numbers are lakh shares, so earnings divided by shares gives Rs per share. Plans finance the same investment and operating EBIT. A: 10 lakh ordinary shares, no interest or preference dividend, supplied P/E 12. B: 6 lakh shares, annual interest 4, no preference dividend, supplied P/E 9. C: 8 lakh shares, no interest, annual preference dividend 3, supplied P/E 11. Corporate tax 25%; coupon interest fully deductible, preference dividend not deductible. All evaluated EBTs are positive. Compare EBIT 12 first. C's preference dividend is deducted from PAT before ordinary EPS. Multiples are fixed conditional case estimates, not guaranteed market quotes. No principal schedules, covenant terms, cash-conversion forecasts or investment-risk adjustments are supplied. For crossovers use the same operating EBIT and tax regime, with EPS=[(EBIT-interest)*(1-t)-preference dividend]/shares. Financial break-even is the EBIT at which ordinary earnings are zero, not a cash-solvency guarantee. Questions are independently scored and do not depend on preceding answers.

Plan comparison	Value / stated unit
Case tax rate, percent	25
Comparison EBIT, Rs lakh	12

FM-C05-T001 · 2 marks

Read shared case

At EBIT 12, B PAT?

A. 8 lakh before tax. B. 5.6 lakh using wrong tax. C. 6 lakh. D. 9 lakh no-interest PAT.

FM-C05-T002 · 2 marks

Read shared case

At EBIT 12, A EPS?

A. Rs 0.75. B. Rs 1.20. C. Rs 0.90. D. Rs 1.00.

FM-C05-T003 · 2 marks

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At EBIT 12, B EPS?

A. Rs 1.3333. B. Rs 0.90. C. Rs 1.00. D. Rs 0.75.

FM-C05-T004 · 2 marks

Read shared case

At EBIT 12, C ordinary EPS?

A. Rs 0.75. B. Rs 0.5625 shielding preference. C. Rs 0.90. D. Rs 1.125 forgetting preference.

FM-C05-T005 · 2 marks

Read shared case

At EBIT 12, supplied A model MPS?

A. Rs 8.25 other plan. B. Rs 14.40 before tax. C. Rs 9.00 other plan. D. Rs 10.80.

FM-C05-T006 · 2 marks

Read shared case

At EBIT 12, supplied B model MPS?

A. Rs 9.00. B. Rs 12.00 before tax. C. Rs 10.80. D. Rs 8.25.

FM-C05-T007 · 2 marks

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C financial break-even EBIT?

A. 12 lakh. B. 4 lakh. C. 0 because no interest. D. 3 lakh without tax gross-up.

FM-C05-T008 · 2 marks

Read shared case

A-B EPS-indifference EBIT?

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

FM-C05-T009 · 2 marks

Read shared case

A-B MPS-indifference EBIT under stated multiples?

A. 4 lakh BEP. B. 12 lakh. C. 10 lakh EPS crossing. D. 20 lakh.

FM-C05-T010 · 2 marks

Read shared case

At EBIT 12, which comparison is justified?

A. B must be best on every criterion. B. C necessarily cash-solvent. C. A highest EPS. D. B highest EPS, A highest supplied MPS; cash/risk verdict remains open.

FM-C05-T011 · 2 marks

No-tax EBIT 30, debt 150 at 10%, constant Ke 20%. Total NI-model value?

A. 225 lakh. B. 200 lakh from other debt. C. 150 lakh. D. 75 lakh equity only.

FM-C05-T012 · 2 marks

NOI EBIT 24, Ko 12%, debt 120 at 8%. Ke?

A. 8%. B. 12%. C. 14.6667% other debt. D. 18%.

FM-C05-T013 · 2 marks

WACCs A 15%, B 13.4%, C 16%, same perpetual EBIT 20. Best supplied model value?

A. C because most debt. B. B is proved continuous global optimum. C. B, about 149.25 lakh, only among stated choices. D. A because most equity always.

FM-C05-T014 · 2 marks

MM no-tax arbitrage requires comparing firms with what?

A. Equivalent business risk and compatible personal/corporate funding assumptions. B. Guaranteed no recourse differences regardless of facts. C. Only identical company names. D. Any unequal operating cash risk.

FM-C05-T015 · 2 marks

PDF page 18 and 27 Ke expressions differ. Best treatment?

A. Automatically choose lowest cost. B. Ignore equity earnings/value checks. C. Call every printed line simultaneous truth. D. Preserve discrepancy and use the specified reconciled model, not silently blend.

FM-C05-T016 · 2 marks

No full usable perpetual coupon shields are established. Can tD be added automatically?

A. Principal repayment itself is a tax shield. B. No, shield amount/timing and discounting require facts. C. All preference payouts generate same deduction. D. Always add tD.

FM-C05-T017 · 2 marks

Sell levered stake 15; buy U stake 20 with personal debt 10. Own funds needed and surplus?

A. 5 own; 10 surplus. B. 15 own; 0 surplus by definition. C. 10 own funds; 5 surplus. D. 20 own; no surplus.

FM-C05-T018 · 2 marks

Going debt 100 to 150 adds shield 15 and expected distress/agency cost 28. Value change?

A. Rises 15 ignoring costs. B. Rises 43. C. Falls 13 lakh on supplied estimates. D. Must mean current legal insolvency.

FM-C05-T019 · 2 marks

Staff exits and worse supplier terms before formal insolvency are what?

A. Always cost-free. B. Proof a court declared insolvency. C. Possible indirect financial-distress costs. D. Only an equity issue fee.

FM-C05-T020 · 2 marks

Shareholders choose riskier investments transferring downside to creditors. Relevant concern?

A. A risk-free arbitrage proof. B. Shareholder-creditor agency conflict. C. No capital-structure effect possible. D. Tax shield automatically increases.

FM-C05-T021 · 2 marks

Internal finance, then debt, then external equity hierarchy primarily relates to what?

A. Debt capacity never matters. B. Information asymmetry and financing frictions, not free retained capital. C. A fixed universal optimal debt ratio. D. All internal cash cost zero.

FM-C05-T022 · 2 marks

No ordinary shares issued with debt. Which claim is unsafe?

A. Covenants need review. B. Debt cannot constrain any operational control. C. Repayment risk needs review. D. Ordinary voting percentage may avoid dilution.

FM-C05-T023 · 2 marks

A has 10 lakh shares/interest 0, B 8 lakh shares/interest 2 lakh, C 6 lakh shares/interest 5 lakh, same tax regime. B-C EPS equality EBIT?

A. 5 lakh interest. B. 10 lakh A-B. C. 12.5 lakh A-C. D. 14 lakh.

FM-C05-T024 · 2 marks

Same three plans at EBIT 12, tax 30%. Highest EPS?

A. C solely because fewest shares. B. A solely because most shares. C. All three tie. D. B: 0.875, compared with A 0.84 and C 0.8167.

FM-C05-T025 · 2 marks

EBIT 8/12/20 probabilities.3/.4/.3, B interest 4/shares 6, tax 30%. Expected EPS?

A. Rs 1.0733, conditional not guaranteed. B. Rs 0.924 other plan. C. A certain payment forecast. D. Rs 1.8667 high outcome only.

FM-C05-T026 · 2 marks

Equal share counts/tax but unequal after-tax fixed charges, in linear regime. EPS crossover?

A. Always one at interest. B. No unique finite crossover. C. Only highest EBIT. D. Every admissible EBIT.

FM-C05-T027 · 2 marks

Raise 20 lakh at Rs 40/share, no fees. New shares?

A. 5 lakh. B. 20 lakh. C. 8 lakh. D. 0.5 lakh.

FM-C05-T028 · 2 marks

EPS/Ke is used as MPS with constant full payout. What breaks a universal claim?

A. Risk never changes. B. All multiples guaranteed. C. Retained growth/investment and payout/model assumptions can differ. D. Earnings always equal cash dividend.

FM-C05-T029 · 2 marks

100 principal repaid after 3 years, annual coupon 8, tax 30%. Undiscounted total coupon shield?

A. 2.4 lakh total. B. 7.2 lakh, not its discounted PV or perpetual 30. C. 100 lakh. D. 30 lakh.

FM-C05-T030 · 2 marks

EBIT exceeds interest but principal and working-capital needs are absent. What is supported?

A. No full cash-solvency conclusion yet. B. Guaranteed all payments covered. C. No principal can ever be due. D. No cash forecast needed.