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Top 100+ Capital Structure Interview Questions And Answers - May 28, 2020

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Top 100+ Capital Structure Interview Questions And Answers

Question 1. What Is Miller's Hypothesis With Corporate And Personal Taxes?

Answer :

Miller's hypothesis with corporate and private taxes : This approach offers vital advantage over fairness. This ignores financial disaster and business enterprise fees.

Question 2. What Is Trade-off Theory?

Answer :

Trade-off principle: expenses and benefits of leverage.

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Question 3. What Is Mm Hypothesis With And Without Corporate Tax?

Answer :

MM speculation with and without company tax : This technique tells that firm's cost is impartial of capital structure. The equal return may be acquired via shareholders with the identical danger.

Question four. What Is Traditional Approach And Net Income (ni) Approach?

Answer :

Traditional technique and Net earnings (NI) technique :- this is an approach in which each price of debt, and equity are unbiased of capital structure. The components which are worried in it are steady and do not depend on how tons debt the company is the usage of.

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Question 5. What Is Net Operating Income (noi)?

Answer :

Net operating income (NOI):- this is an approach in which each price of the firm and weighted average cost are independent of capital shape. Individual protecting the debt and equity receives the equal coins flows without demanding about the taxes as they may be not worried in it.

General Accounting Interview Questions
Question 6. Explain Combined Leverage?

Answer :

it is a leverage which refers to excessive income because of fixed expenses. It consists of fixed working prices with fixed financial expenses. It shows leverage blessings and risks which are in constant amount. Competitive corporations select high stage of diploma of blended leverage whereas cooperative firms choose lower degree of degree of mixed leverage.

Question 7. What Is Combined Leverage?

Answer :

it's miles a leverage which refers to high income due to constant fees. It consists of constant operating charges with constant monetary costs. It suggests leverage blessings and dangers that are in constant amount. Competitive firms pick out high level of diploma of combined leverage whereas cooperative firms select lower level of degree of mixed leverage.

Financial Accounting Interview Questions
Question eight. What Is Financial Leverage?

Answer :

It is a leverage which refers to excessive level of profitability because of high constant monetary prices. It includes hobby on loan and desire dividend. Higher economic leverage suggests better monetary hazard as well as better wreck factors. In this kind the managers have flexibility in preference of capital shape.

Question 9. What Is Operating Leverage?

Answer :

it's miles a leverage which refers to the enhancement of earnings due to the fact there may be a set operating fee that's involved with each and each thing. When the sales will increase fixed price doesn't increase and it effects in better earnings. Higher constant prices consequences in higher running leverage which ends up in higher business chance.

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Question 10. What Is Timing Principle?

Answer :

Timing Principle: this principle deals with capital structure which ought to be capable of have marketplace opportunities and which have to be able to minimize cost of raising price range and reap the savings.

Question 11. What Is Flexibility Principle?

Answer :

Flexibility Principle: this precept offers with capital shape which can have additional requirements of price range in destiny.

Business Management for Financial Advisers Interview Questions
Question 12. What Is Control Principle?

Answer :

Control Principle: this precept deals with the capital structure that's maintaining the controlling position of owners. Preference shareholders possesses no balloting rights and do not disturb positions.

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Question thirteen. What Is Risk Principle?

Answer :

Risk Principle: this principle offers with the capital shape which have to now not be given excessive risk. If corporation problem massive quantity of desire shares out of the profits of the organisation then much less quantity will be unnoticed for fairness shareholders as dividend is paid after the choice stocks.

Question 14. What Is Cost Principle?

Answer :

Cost Principle: this principle deals with the appropriate capital structure which have to reduce value of financing and maximize the earnings according to percentage. The inexpensive shape of capital structure is debt capital.

Question 15. What Is Control Factor?

Answer :

These elements had been considered through the non-public organizations even as elevating additional budget and planning the capital structure. In this employer plans to elevate long term price range by means of problem the fairness and preference stocks. It would not have relation with the borrowed capital.

Cost Accounting Interview Questions
Question 16. What Is Risk Factor?

Answer :

Company elevating the capital by means of borrowed capital, as it accepts the danger in two methods:

Company maintains the price of hobby as well as installments of borrowed capital at predecided charge and time with out being concerned about the income and losses.
Borrowed capital is secured capital in the case wherein the employer fails to fulfill the contract performed with the creditors of the money.
Question 17. What Is Cost Of Capital?

Answer :

it's far a system of elevating the finances which includes the fee in planning the capital shape, using capital have to be able to incomes revenue to meet the value of capital.

There are modifications on this because of  reasons:

Interest charges are less than dividend quotes.
Interest paid on borrowed capital is an allowable for income tax purposes.
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Question 18. What Are The Internal Factors Affecting Capital Structure?

Answer :

The inner factors which are affecting capital structure are as follows:-

1) Cost of capital : - it is a procedure of raising the finances which includes the cost in making plans the capital structure, the usage of capital ought to be able to incomes revenue to meet the price of capital.

There are modifications in this due to  motives:

Interest costs are less than dividend charges.
Interest paid on borrowed capital is an allowable for profits tax functions.
2) Risk factor : Company elevating the capital through borrowed capital, as it accepts

the threat in  ways:

Company keeps the payment of hobby as well as installments of borrowed capital at predecided price and time with out being concerned approximately the income and losses.
Borrowed capital is secured capital in the case wherein the corporation fails to fulfill the contract carried out with the creditors of the money.
3) Control Factor: These factors had been considered with the aid of the private businesses while elevating additional price range and planning the capital structure. In this business enterprise plans to elevate long term finances by problem the fairness and choice stocks. It does not have relation with the borrowed capital.

General Accounting Interview Questions
Question 19. What Are The External Factors Affecting Capital Structure?

Answer :

The external factors that are affecting the capital shape are as follows:-

Economic Conditions: If the financial system is in kingdom of melancholy, choice is given to equity shape of capital which involves less amount of chance but it is prevented in some cases in which the investor isn't equipped to take the risk. In this example agency cross on with the borrowed capital.
Interest Rates stage : Form of borrowed capital might be not on time if the budget are to be had in excessive costs of hobby but raising is not beneficial.
Lending Policy : If coverage is difficult to understand and now not flexible then it is good to go with the borrowed capital.
Taxation Policy: This policy need to be regarded from both the perimeters from man or woman as well as company attitude. From the person factor of view both interest as well as dividend could be taxable in fingers of lender.
Question 20. What Are The General Factors Affecting Capital Structure?

Answer :

The widespread factors that are affecting the capital shape are as follows:-

Company constitution : In groups capital structure may be very vital as many corporations treat it as a unique entity. Private organizations considers manage factor as crucial while public agency reveals price element greater essential.
Company characteristics : Characteristic of the agency which describe its infrastructure as size, age and credit plays pivotal position in determining the capital shape. Smaller or newly commenced businesses depend more on fairness capital as they are able to do constrained bargaining. Large agencies or having correct credit score agencies are within the function to get funds from the supply in their choice.
Stability of Earnings : Fluctuations occurs if the income and earnings of the business enterprise are not solid sufficient over a period of time. Stable agency can take the risk.
Attitude of the Management: Attitude plays an crucial position as though the mindset is conservative then manage factor gets the significance and if it's far liberal then cost factor gets critical.
Budgetary Control Interview Questions
Question 21. Compare Component Cost And Composite Cost?

Answer :

The factor price is the only which comes below the cost of capital and it has 3 tiers:-

Return at zero risk degree: which tells approximately the predicted fee of return when there's no risk involved in the mission
Premium for business chance: This tells approximately the variance in working income due to alternate in sales.
Premium for monetary risk: This tells about the captital structure threat.
It is the choice whether to shop for components or services from an interloper or now not. It requires know-how the fee associated with building and buying the additives.

Composite Capital is also called the weighted average of issue cost of common inventory, desire shares and debt. In this each of the components is given an importance on its hobby fee, risk analysis and control lack of control that's used to compute the composite capital.

Question 22. Explain Average Cost And Marginal Cost?

Answer :

Average value is also known as as unit price which is identical to the entire price divided by means of quantity of goods produced or additionally same to the sum of common variable fees and the common constant prices. This relies upon at the time period and also has the have an effect on at the deliver curve.

Marginal price is the exchange in general value which takes vicinity when there's a exchange in quantity through one unit. It depends on the exchange in volume. It includes at every stage of the production additional expenses that is required to supply the following unit. For example constructing a constructing calls for building the bottom you then require extra fee for space and different building material.

Question 23. Explain Explicit Cost And Implicit Cost?

Answer :

Explicit fee is the value that is external to the business like wage, rent and materials. It offers clean image of the coins outflow from commercial enterprise which is used to decrease the cease end result of profitability. This without delay affects the sales of the employer.

Implicit price is the end result of 1 person who attempts to meet his needs in search of an activity which gives no reward to him by means of cash or any other shape of charge. It includes advantages and pleasure. For instance- goodwill. It is not counted in phrases of cash and it is oblique intangible value.

Marginal value Interview Questions
Question 24. Explain Cost Of Capital And Its Importance?

Answer :

Cost of the capital is the price of return which is minimal which must be earned on investments in order to satisfy the investors of numerous sorts who're making investments in the employer inside the shape of shares, debentures and loans. It is utilized in monetary investment which refers back to the price of a business enterprise's finances or the shareholders return at the organization's current offers. It is the specified fee that a business enterprise should attain to cover the cost of generating funds within the market. By seeing this handiest the investor invests the cash inside the agency if the business enterprise is giving the required fee of go back. It is a guideline to measure the profitability of different investments.

The importance of fee of capital is that it's far used to assess new undertaking of organisation and allows the calculations to be clean so that it has minimum go back that investor count on for imparting investment to the agency. It has such an importance in financial choice making.

It clearly utilized in managerial choice making in certain field which include-

Decision on capital budgeting- It is used to degree the investment thought to select a mission which satisfies go back on investment.
Used in designing corporate economic shape- it is used to layout the marketplace fluctuations and try to gain the low-budget capital structure for company.
Top management overall performance- It evaluates the financial overall performance of pinnacle executives. It involves the contrast of actual earnings of the projects and taken initiatives general cost.
Financial Accounting Interview Questions
Question 25. What Is How Is The Cost Of Capital Measured?

Answer :

Cost of capital is measured in phrases of weighted common price of capital. In this the whole capital value of a firm without any wonderful warrants and the cost of its debt are blanketed collectively to calculate the fee of capital.

To calculate the corporation's weighted fee of capital, first the calculation of the costs of the individual financing assets:

Cost of Debt Cost of Preference Capital, Cost of Equity Capital, and fee of inventory capital take region and the formula is given as:-

WACC= Wd (value of debt) + ws (price of stock/RE) + wp (price of pf. Stock)

in which WACC= weighted common fee of capital.

Question 26. What Is Cost Of Retained Earnings?

Answer :

Cost of retained profits have the opportunity fee associated with it and it is able to be computed as nicely without any difficulty. The opportunity cost in that is same as the rate of go back of the shareholders which decide the cut off factor for the offers. It is also the price of go back which shareholders can get with the aid of investing after tax dividends in alternative opportunity.

Chartered accountant Interview Questions
Question 27. What Is Cost Of Equity Shares?

Answer :

Cost of equity shares is the hardest job to calculate and it also raises plenty of hassle at the same time as running on its calculations. Its foremost reason is to permit the control which is to make the decisions within the exceptional interest of the equity holders. There is a positive quantity of equity capital which must be earned on tasks earlier than raising any fairness price range or attractiveness of finance for other tasks.

Accounts Interview Questions
Question 28. What Is Cost Of Preference Shares?

Answer :

Costs of preference share are also used to calculate the price of capital and are the constant cost bearing securities. In this the rate of dividend is constant earlier while they're issued. It is identical to the ratio of annual dividend profits according to stocks to internet continue. It is not used for taxes and it need to not be adjusted for the equal. Basically it's miles large than the price of debt.

Question 29. What Is Cost Of Debt?

Answer :

It is used to measure the fee of capital. This is the first factor which should be calculated inside the beginning to find out the cost of capital. It includes each contractual price and imputed fee. It is defined as the specified price of return that an investment which is debt has to yield to shield the shareholder's interest.

Cost of goods offered Interview Questions
Question 30. What Is Modigliani- Miller (m And M) Approach?

Answer :

Modigilani-Miller approach is also called MM approach which appears much like Net operating earnings technique. It is in synchronization with the Net running income approach and states in acceptance with the method that cost of capital is unbiased of degree of leverage. It gives justification for operational and behavioral for constant value of capital at any diploma of leverage as this is not being supplied through the Net running Income technique. It is been assumed in this method that capital markets are perfect and the investors are investing within the company from the identical expectation of the business enterprise's internet working earnings in search of comparing the cost of the company.

The propositions of this technique may be stated within the following approaches and it is as follows:-

Company's standard value of capital and cost of the firm is steady at any diploma of leverage as it is unbiased of the capital structure.
Capital funding which has the minimum reduce-off price is likewise impartial of project budget.
If this method has benefits then it has sure boundaries associated with it and the limitations are as follows:-

Investors discover the leverages inconvenient and threat perception of company and private leverage is exclusive.
Corporate doesn't exist however it receives removed later.
Arbitrary manner would not have any restrictions and it is also not be affected by transaction value.
Question 31. What Does High/ Low Financial Leverage Indicate?

Answer :

High financial leverage suggests the unstable funding made by the organization's shareholders. Low monetary leverage shows that management has adopted a very good method towards the debt capital. This decreases the control selection making on earning in keeping with proportion.

Question 32. What Does Financial Leverage Indicate? What Are Its Limitations?

Answer :

Financial leverage indicates borrow of finances to elevate the capital by way of issuing stocks within the market to meet their commercial enterprise necessities. This also suggests the profitability and return on equity of the organisation which has taken giant quantities of debt.

The economic leverage has many blessings but it possess a few limitations as nicely which has been proven as follows:-

When a agency borrows funds the use of economic leverage then this cash develops an environment that could both creates lots of profits or a small quantity of it.
Borrowing continuously creates an image that the organisation is probably on high hazard. Which in flip will increase the interest prices and a few restrictions may be exceeded over to the borrowing business enterprise.
Value of stock also gets affected as it is able to drop notably if the stockholders intervene in between.
Question 33. Explain High Operating Leverage, High Financial Leverage?

Answer :

High operating leverage and excessive economic leverage shows the unstable investment made by the enterprise's shareholders. This additionally suggests that enterprise is making few sales however with high margins. This suggests the threat if a company incorrectly forecasts destiny sales.

If the future sales have been manipulative forecasted then it create a difference among real and budgeted cash go with the flow, which influences the employer's destiny running capability.

The economic leverage poses excessive threat when a agency's go back on assets does not exceed hobby on mortgage, which lowers down enterprise's return on equity and profitability.

Business Management for Financial Advisers Interview Questions
Question 34. Explain High Operating Leverage, Low Financial Leverage?

Answer :

High operating leverage indicates that business enterprise is making few income but with high margins. This suggests the chance if a firm incorrectly forecasts destiny sales. If the destiny sales have been manipulative forecasted then it create a distinction between actual and budgeted coins flow, which impacts the organisation's destiny running capacity. Low monetary leverage indicates that management has followed a excellent technique in the direction of the debt capital. This decreases the management choice making on incomes in keeping with proportion. This is the most suitable scenario.

Question 35. Explain Low Operating Leverage, High Financial Leverage?

Answer :

If economic leverage is excessive than the price range are acquired specially thru choice stocks, debentures and debts. This makes the base strong with the aid of retaining the working leverage low on scale. The financial decision may be maximized as the management's concern may be earning in keeping with proportion to be able to favour the debt capital most effective.

This will growth when the rate of interest on debentures is lower than rate of return in business. The selection is based totally on incomes according to proportion with none indication of the risks worried.

Question 36. Explain Low Operating Leverage, Low Financial Leverage?

Answer :

This is also a worst state of affairs in which each working leverage and economic leverage are low which ends up in undesirable effects. Low diploma of these leverages indicates that the amount of fixed charges is very small and proportion of debts in capital is also low. The control in this case may free number of profitable possibilities and investments.

Cost Accounting Interview Questions
Question 37. Explain Traditional Approach Of Capital Structure?

Answer :

Traditional technique is likewise known as Net profits approach but it's far the most effective form. It is in between the alternative two theories named as Net income theory and Net working earnings idea. This approach has been formulated by way of Ezta Solomon and Fred Weston. This idea gives the proper and correct mixture of debt and equity stocks and usually lead to improved market fee of the company.

This approach tells approximately the economic hazard so that it will be undertaken by way of the fairness shareholders. This approach focuses mainly on increasing the price of fairness capital that allows you to be finished after a stage of debt within the capital shape.

Question 38. Explain Operating Income Approach. Who Proposed This Theory?

Answer :

Operating earnings technique is the technique which suggests the choice of capital structure towards a company is irrelevant and trade in leverage or debt doesn't bring about alternate of total and market price of the firm. It tells that ordinary cost of capital is independent of degree of leverage. This technique changed into additionally proposed by means of David Durand.

Question 39. What Is Capital Structure? What Are The Principles Of Capital Structure Management?

Answer :

Capital structure is a time period which is noted be the combination of resources from which the long time finances are required for enterprise functions which are raised to enhance the capital of the agency. To fund an company plan this capital structure is required that's the mixture of debt and fairness. The management ensures the capital structure accesses which can be needed to fund future boom and beautify financial performance.

The principles of capital shape management that are basically required are as follows:-

Cost Principle
Risk Principle
Control Principle
Flexibility Principle
Timing Principle
Question 40. Explain Net Income Approach. Who Proposed This Theory?

Answer :

Net profits (NI) approach as that is additionally referred to as as traditional approach. This is an technique in which each price of debt, and equity are unbiased of capital shape. The components which can be concerned in it are constant and doesn't rely on how a great deal debt the firm is the use of.

This principle became proposed by using David Durand. In this modification in monetary leverage results in change in typical value of capital as well as total price of firm. If economic leverage increases, weighted average cost decreases and price of company and marketplace price of equity increases.

If this decreases then weighted average value of capital will increase and fee of firm and marketplace charge of equity decreases. The assumptions which may be made consistent with this technique is that there are no taxes concerned in this and the usage of debt doesn't change the chance component for the traders and will continue to be the equal throughout.

Budget and Planning Interview Questions
Question forty one. Name The Theories Of Capital Structure?

Answer :

Capital shape is a term which is stated be the mixture of assets from which the long term finances are required for commercial enterprise purposes which can be raised to enhance the capital of the employer.

The theories that are worried in these are as follows:- 

Net running income (NOI):- this is an method in which both cost of the firm and weighted average cost are unbiased of capital shape. Individual keeping the debt and fairness gets the equal coins flows without annoying approximately the taxes as they're not involved in it.
Traditional method and Net earnings (NI) approach :- that is an method in which both value of debt, and fairness are impartial of capital structure. The components that are worried in it are regular and do not depend upon how tons debt the firm is the usage of.
MM speculation with and without company tax : This method tells that company's price is impartial of capital structure. The same return may be obtained via shareholders with the identical risk.
Miller's hypothesis with corporate and private taxes : This technique gives critical gain over fairness. This ignores bankruptcy and organization charges.
Trade-off theory: prices and blessings of leverage.
Question forty two. What Is Combined Leverage? How Is It Calculated?

Answer :

Combined leverage is a leverage which refers to excessive profits due to fixed charges. It consists of constant running charges with constant economic charges. It suggests leverage benefits and risks which might be in fixed quantity.

Competitive corporations pick high stage of diploma of combined leverage while conservative companies pick out decrease level of diploma of mixed leverage. Degree of blended leverage shows advantages and risks worried in this unique leverage.

The method which is used to calculate this is as follows-

Degree of mixed leverage = Degree of running leverage * Degree of monetary leverage.

Budgetary Control Interview Questions
Question 43. What Are The Different Types Of Leverages Computed For Financial Analysis?

Answer :

Different forms of leverage computed for monetary evaluation and they're as follows:-

Operating Leverage : - it's miles a leverage which refers back to the enhancement of earnings because there's a hard and fast running fee that's worried with every and every element. When the income increases constant price does not growth and it consequences in higher earnings. Higher constant costs outcomes in higher operating leverage which ends up in higher business risk.
Financial Leverage : - It is a leverage which refers to high level of profitability because of excessive fixed economic prices. It consists of hobby on mortgage and preference dividend. Higher monetary leverage indicates better economic hazard as well as higher smash points. In this type the managers have flexibility in desire of capital structure.
Combined Leverage: - it is a leverage which refers to excessive profits due to fixed charges. It includes constant running expenses with fixed economic expenses. It shows leverage blessings and dangers which might be in constant amount. Competitive firms choose high level of diploma of blended leverage whereas cooperative corporations choose decrease level of diploma of combined leverage.
Question forty four. Explain Leverages?

Answer :

Leverage is a widespread time period which is used in economic management and it's miles used as a method to multiply the gains and losses. It refers of attainment of more advantages on comparative lower stage of funding or lower sales. There are many ways to achieve leverage the most not unusual of all of them is borrowing money, shopping for the fixed property and use of derivatives.

Examples of these are as follows:-

Public corporation may also leverage its equity by means of borrowing cash. The more a company borrows less equity capital it desires so the profits and losses are shared among small group of humans.
Business Corporation can also leverage its sales by shopping for fixed assets. This gets more constant proportion to the organization in preference to variable price as trade in sales will bring about large exchange in working profits.




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