Interview Questions.

Q1. Name The Theories Of Capital Structure?

Capital shape is a term that's cited be the mix of resources from which the long term price range are required for enterprise functions which can be raised to enhance the capital of the enterprise.

The theories which can be involved in these are as follows:- 

Net operating income (NOI):- that is an technique wherein each price of the firm and weighted average cost are independent of capital structure. Individual holding the debt and fairness gets the equal coins flows without disturbing approximately the taxes as they may be no longer worried in it.

Traditional technique and Net earnings (NI) technique :- that is an technique in which each value of debt, and fairness are independent of capital shape. The additives which are concerned in it are constant and don't depend on how lots debt the company is using.

MM speculation with and without company tax : This approach tells that company's fee is impartial of capital structure. The equal go back can be received by way of shareholders with the same chance.

Miller's speculation with company and private taxes : This technique offers essential gain over equity. This ignores financial ruin and employer prices.

Trade-off concept: charges and advantages of leverage.

Q2. What Are The External Factors Affecting Capital Structure?

The outside factors which are affecting the capital structure are as follows:-

Economic Conditions: If the economic system is in nation of depression, preference is given to fairness shape of capital which entails much less amount of risk but it's far prevented in a few instances in which the investor is not equipped to take the threat. In this example employer move on with the borrowed capital.

Interest Rates level : Form of borrowed capital will be behind schedule if the budget are to be had in high fees of hobby but raising isn't beneficial.

Lending Policy : If policy is hard to recognize and no longer flexible then it is ideal to go together with the borrowed capital.

Taxation Policy: This coverage should be regarded from each the edges from character in addition to corporate attitude. From the character point of view each hobby in addition to dividend can be taxable in arms of lender.

Q3. Explain High Operating Leverage, High Financial Leverage?

High running leverage and high monetary leverage suggests the volatile funding made by way of the organization's shareholders. This also indicates that employer is making few sales however with excessive margins. This suggests the risk if a company incorrectly forecasts destiny sales.

If the destiny sales were manipulative forecasted then it create a difference among actual and budgeted cash go with the flow, which affects the company's future running ability.

The monetary leverage poses excessive chance when a organisation's return on property does not exceed hobby on loan, which lowers down agency's go back on fairness and profitability.

Q4. Explain Combined Leverage?

It is a leverage which refers to high income because of constant fees. It includes constant operating charges with fixed financial prices. It shows leverage blessings and risks which can be in constant quantity. Competitive companies choose high degree of diploma of combined leverage whereas cooperative corporations choose decrease level of degree of mixed leverage.

Q5. Explain Low Operating Leverage, Low Financial Leverage?

This is likewise a worst scenario where each operating leverage and financial leverage are low which leads to unwanted consequences. Low degree of those leverages indicates that the quantity of constant prices is very small and percentage of money owed in capital is also low. The control in this case may unfastened range of profitable possibilities and investments.

Q6. What Is Cost Of Capital?

It's far a technique of raising the price range which entails the value in planning the capital shape, the usage of capital should be capable of earning sales to fulfill the price of capital.

There are changes on this because of  motives:

Interest costs are less than dividend costs.

Interest paid on borrowed capital is an allowable for profits tax functions.

Q7. What Are The Internal Factors Affecting Capital Structure?

The internal elements which might be affecting capital shape are as follows:-

1) Cost of capital : - it's miles a process of elevating the funds which entails the cost in making plans the capital shape, the usage of capital should be able to earning sales to satisfy the value of capital.

There are changes on this due to two motives:

Interest costs are less than dividend costs.

Interest paid on borrowed capital is an allowable for profits tax functions.

2) Risk factor : Company elevating the capital with the aid of borrowed capital, because it accepts

the danger in two methods:

Company keeps the price of interest in addition to installments of borrowed capital at predecided rate and time without being worried approximately the income and losses.

Borrowed capital is secured capital inside the case in which the company fails to satisfy the agreement finished with the creditors of the money.

3) Control Factor: These elements had been considered by way of the personal agencies whilst elevating additional price range and planning the capital shape. In this corporation pl to elevate long term funds by difficulty the fairness and choice shares. It would not have relation with the borrowed capital.

Q8. What Are The Different Types Of Leverages Computed For Financial Analysis?

Different types of leverage computed for monetary analysis and they are as follows:-

Operating Leverage : - it is a leverage which refers back to the enhancement of profits because there may be a hard and fast operating price which is involved with every and every factor. When the sales increases fixed value doesn't boom and it consequences in better profits. Higher constant expenses effects in better operating leverage which ends up in higher enterprise hazard.

Financial Leverage : - It is a leverage which refers to excessive degree of profitability because of high constant financial fees. It consists of interest on loan and preference dividend. Higher financial leverage indicates higher economic danger as well as higher break points. In this type the managers have flexibility in desire of capital shape.

Combined Leverage: - it is a leverage which refers to excessive income because of constant prices. It consists of constant operating charges with fixed monetary fees. It suggests leverage advantages and risks which might be in fixed amount. Competitive corporations choose high stage of degree of blended leverage while cooperative firms pick out decrease level of diploma of blended leverage.

Q9. What Is Operating Leverage?

It's far a leverage which refers back to the enhancement of profits due to the fact there may be a set operating value that's concerned with each and each thing. When the income will increase fixed cost does not growth and it outcomes in better profits. Higher constant costs outcomes in better working leverage which ends up in higher business hazard.

Q10. What Is Trade-off Theory?

Trade-off theory: fees and advantages of leverage.

Q11. What Does High/ Low Financial Leverage Indicate?

High economic leverage shows the risky funding made via the organisation's shareholders. Low financial leverage suggests that control has followed a excellent approach closer to the debt capital. This decreases the control choice making on earning consistent with percentage.

Q12. Explain High Operating Leverage, Low Financial Leverage?

High operating leverage suggests that enterprise is making few income but with excessive margins. This shows the hazard if a firm incorrectly forecasts future sales. If the future sales have been manipulative forecasted then it create a distinction among real and budgeted cash go with the flow, which impacts the employer's future running capability. Low monetary leverage indicates that control has adopted a very good technique in the direction of the debt capital. This decreases the control choice making on earning in step with share. This is the most effective scenario.

Q13. What Is Cost Of Preference Shares?

Costs of preference percentage also are used to calculate the fee of capital and are the constant price bearing securities. In this the fee of dividend is constant in advance whilst they may be issued. It is equal to the ratio of annual dividend earnings in step with shares to internet proceed. It isn't always used for taxes and it need to now not be adjusted for the equal. Basically it is large than the cost of debt.

Q14. What Is Timing Principle?

Timing Principle: this principle deals with capital structure which have to be able to have market possibilities and which should be able to minimize cost of raising finances and achieve the savings.

Q15. What Is Traditional Approach And Net Income (ni) Approach?

Traditional method and Net income (NI) technique :- this is an technique in which each fee of debt, and fairness are unbiased of capital shape. The components which can be worried in it are consistent and don't rely upon how plenty debt the firm is the use of.

Q16. Compare Component Cost And Composite Cost?

The aspect value is the only which comes under the value of capital and it has 3 levels:-

Return at 0 chance level: which tells approximately the anticipated charge of return whilst there may be no threat involved within the task

Premium for enterprise danger: This tells approximately the variance in working profit due to change in sales.

Premium for economic chance: This tells approximately the captital shape hazard.

It is the choice whether to shop for additives or offerings from an intruder or not. It calls for knowledge the fee associated with building and shopping for the components.

Composite Capital is likewise called the weighted common of factor cost of commonplace stock, preference shares and debt. In this each of the components is given an importance on its interest charge, threat evaluation and management lack of manipulate that's used to compute the composite capital.

Q17. What Does Financial Leverage Indicate? What Are Its Limitations?

Financial leverage indicates borrow of finances to raise the capital via issuing shares within the market to satisfy their commercial enterprise necessities. This also suggests the profitability and return on equity of the organisation which has taken giant amounts of debt.

The financial leverage has many benefits but it own a few limitations as well which has been proven as follows:-

When a business enterprise borrows funds using monetary leverage then this cash develops an surroundings that can both creates plenty of profits or a small quantity of it.

Borrowing constantly creates an picture that the corporation is probably on high chance. Which in turn increases the interest charges and some restrictions can be surpassed over to the borrowing corporation.

Value of inventory also receives affected as it may drop significantly if the stockholders intrude in among.

Q18. What Is Risk Factor?

Company elevating the capital via borrowed capital, because it accepts the hazard in two methods:

Company continues the price of hobby in addition to installments of borrowed capital at predecided price and time without being involved about the income and losses.

Borrowed capital is secured capital within the case in which the enterprise fails to meet the contract performed with the lenders of the cash.

Q19. Explain Traditional Approach Of Capital Structure?

Traditional approach is likewise known as Net profits technique but it's far the best form. It is in between the alternative  theories named as Net income principle and Net operating income idea. This approach has been formulated via Ezta Solomon and Fred Weston. This concept offers the right and correct aggregate of debt and fairness stocks and always result in enhanced marketplace value of the company.

This approach tells about the financial danger in order to be undertaken by the equity shareholders. This method focuses in particular on growing the fee of fairness capital on the way to be carried out after a level of debt within the capital structure.

Q20. What Is Cost Of Equity Shares?

Cost of fairness shares is the hardest job to calculate and it also raises plenty of trouble whilst operating on its calculations. Its predominant reason is to enable the management which is to make the decisions in the fine hobby of the fairness holders. There is a certain quantity of fairness capital which must be earned on projects before elevating any fairness budget or attractiveness of finance for different projects.

Q21. Explain Average Cost And Marginal Cost?

Average price is likewise called as unit fee that is same to the whole fee divided via range of goods produced or also equal to the sum of common variable fees and the common constant prices. This depends on the time period and additionally has the affect on the deliver curve.

Marginal cost is the change in total fee which takes place while there is a trade in amount by using one unit. It depends at the trade in quantity. It consists of at every level of the production extra expenses which is required to supply the following unit. For example constructing a constructing requires building the base you then require more price for area and different building fabric.

Q22. Explain Leverages?

Leverage is a popular term that's used in economic management and it's miles used as a technique to multiply the profits and losses. It refers of attainment of greater blessings on comparative decrease stage of investment or lower sales. There are many approaches to attain leverage the most commonplace of them all is borrowing money, buying the constant belongings and use of derivatives.

Examples of these are as follows:-

Public corporation may additionally leverage its fairness by using borrowing money. The extra a company borrows less equity capital it needs so the earnings and losses are shared amongst small organization of human beings.

Business Corporation may additionally leverage its revenue by using buying fixed property. This gets more fixed proportion to the company as opposed to variable value as change in revenue will bring about large change in operating income.

Q23. Explain Operating Income Approach. Who Proposed This Theory?

Operating profits technique is the technique which shows the decision of capital structure towards a firm is beside the point and alternate in leverage or debt doesn't result in alternate of overall and marketplace charge of the company. It tells that ordinary value of capital is independent of degree of leverage. This method changed into additionally proposed with the aid of David Durand.

Q24. What Are The General Factors Affecting Capital Structure?

The standard elements which might be affecting the capital structure are as follows:-

Company constitution : In agencies capital structure is very essential as many corporations treat it as a different entity. Private organizations considers manage aspect as essential whereas public enterprise reveals price thing greater crucial.

Company characteristics : Characteristic of the organisation which describe its infrastructure as length, age and credit score performs pivotal function in figuring out the capital structure. Smaller or newly commenced corporations rely more on equity capital as they can do confined bargaining. Large companies or having right credit businesses are in the role to get funds from the supply of their desire.

Stability of Earnings : Fluctuations occurs if the income and earnings of the organisation aren't strong sufficient over a period of time. Stable agency can take the chance.

Attitude of the Management: Attitude plays an crucial function as if the mind-set is conservative then control aspect receives the importance and if it's miles liberal then price thing gets crucial.

Q25. Explain Net Income Approach. Who Proposed This Theory?

Net profits (NI) method as that is also referred to as as traditional method. This is an technique in which each fee of debt, and equity are impartial of capital structure. The additives which might be worried in it are consistent and would not depend upon how an awful lot debt the company is using.

This idea become proposed through David Durand. In this variation in economic leverage leads to trade in typical value of capital as well as total fee of firm. If financial leverage increases, weighted average price decreases and cost of company and market price of fairness will increase.

If this decreases then weighted common cost of capital will increase and cost of firm and market rate of fairness decreases. The assumptions which can be made in keeping with this technique is that there are not any taxes worried on this and the use of debt would not alternate the chance component for the buyers and could continue to be the identical at some stage in.

Q26. What Is Net Operating Income (noi)?

Net operating income (NOI):- this is an method wherein each fee of the company and weighted common value are independent of capital structure. Individual protecting the debt and fairness gets the same coins flows with out worrying approximately the taxes as they're now not concerned in it.

Q27. Explain Low Operating Leverage, High Financial Leverage?

If monetary leverage is high than the finances are acquired mainly through desire stocks, debentures and debts. This makes the bottom stable by way of preserving the running leverage low on scale. The financial selection may be maximized because the management's challenge may be earning consistent with share as a way to favour the debt capital handiest.

This will boom whilst the price of hobby on debentures is lower than charge of return in commercial enterprise. The choice is primarily based on earning in line with proportion without any indication of the dangers involved.

Q28. What Is Combined Leverage? How Is It Calculated?

Combined leverage is a leverage which refers to excessive income because of fixed expenses. It consists of fixed running charges with fixed financial fees. It indicates leverage blessings and risks which are in fixed amount.

Competitive corporations select high level of diploma of combined leverage while conservative companies choose lower degree of diploma of mixed leverage. Degree of blended leverage suggests benefits and dangers worried on this specific leverage.

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

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

Q29. What Is Capital Structure? What Are The Principles Of Capital Structure Management?

Capital structure is a term which is cited be the mix of resources from which the long time budget are required for commercial enterprise purposes which can be raised to improve the capital of the enterprise. To fund an corporation plan this capital structure is needed that's the combination of debt and fairness. The control guarantees the capital structure accesses that are needed to fund destiny boom and decorate economic overall performance.

The standards of capital structure management which can be basically required are as follows:-

Cost Principle

Risk Principle

Control Principle

Flexibility Principle

Timing Principle

Q30. What Is Miller's Hypothesis With Corporate And Personal Taxes?

Miller's speculation with corporate and private taxes : This method gives important gain over equity. This ignores financial ruin and business enterprise prices.

Q31. What Is Control Principle?

Control Principle: this precept deals with the capital shape that's maintaining the controlling position of proprietors. Preference shareholders possesses no vote casting rights and do not disturb positions.

Q32. What Is Cost Principle?

Cost Principle: this principle offers with the perfect capital shape which must decrease price of financing and maximize the earnings according to share. The cheaper shape of capital shape is debt capital.

Q33. What Is Modigliani- Miller (m And M) Approach?

Modigilani-Miller method is also referred to as MM technique which looks similar to Net running profits method. It is in synchronization with the Net running income technique and states in attractiveness with the technique that price of capital is unbiased of degree of leverage. It gives justification for operational and behavioral for constant cost of capital at any diploma of leverage as this isn't being supplied through the Net operating Income method. It is been assumed in this method that capital markets are ideal and the investors are investing in the company from the equal expectation of the business enterprise's internet operating profits looking for evaluating the fee of the firm.

The propositions of this method can be mentioned inside the following ways and it's miles as follows:-

Company's universal cost of capital and cost of the firm is regular at any degree of leverage as it is impartial of the capital structure.

Capital investment which has the minimal cut-off rate is also independent of mission price range.

If this technique has blessings then it has sure barriers related to it and the restrictions are as follows:-

Investors discover the leverages inconvenient and danger perception of company and private leverage is exceptional.

Corporate doesn't exist but it receives removed later.

Arbitrary manner would not have any regulations and it is also now not be affected by traction value.

Q34. Explain Explicit Cost And Implicit Cost?

Explicit value is the value which is external to the business like salary, lease and substances. It gives clean photo of the coins outflow from enterprise which is used to decrease the quit end result of profitability. This directly impacts the revenue of the company.

Implicit cost is the result of 1 person who attempts to satisfy his wishes searching for an interest which offers no reward to him by cash or another form of payment. It includes blessings and pleasure. For instance- goodwill. It isn't always counted in terms of money and it's far oblique intangible price.

Q35. What Is How Is The Cost Of Capital Measured?

Cost of capital is measured in terms of weighted common cost of capital. In this the whole capital fee of a firm with none terrific warrants and the value of its debt are protected collectively to calculate the value of capital.

To calculate the enterprise's weighted cost of capital, first the calculation of the prices of the individual financing sources:

Cost of Debt Cost of Preference Capital, Cost of Equity Capital, and value of stock capital take area and the formulation is given as:-

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

where WACC= weighted average cost of capital.

Q36. What Is Risk Principle?

Risk Principle: this precept offers with the capital shape which should no longer be given excessive hazard. If organization issue huge quantity of desire shares out of the profits of the organisation then less quantity might be disregarded for fairness shareholders as dividend is paid after the preference stocks.

Q37. What Is Financial Leverage?

It is a leverage which refers to high level of profitability due to excessive constant monetary fees. It includes hobby on mortgage and choice dividend. Higher economic leverage suggests higher financial chance in addition to higher destroy points. In this type the managers have flexibility in choice of capital shape.

Q38. What Is Mm Hypothesis With And Without Corporate Tax?

MM hypothesis with and with out company tax : This method tells that firm's value is impartial of capital structure. The identical return can be acquired through shareholders with the same chance.

Q39. What Is Combined Leverage?

It is a leverage which refers to excessive profits due to constant costs. It consists of fixed operating expenses with constant monetary expenses. It indicates leverage blessings and dangers which are in constant amount. Competitive firms pick excessive level of degree of mixed leverage whereas cooperative companies choose lower stage of diploma of combined leverage.

Q40. What Is Cost Of Retained Earnings?

Cost of retained earnings have the possibility value associated with it and it may be computed as nicely with none problem. The possibility fee in this is equal because the fee of return of the shareholders which decide the cut off factor for the deals. It is likewise the price of go back which shareholders can get by using investing after tax dividends in opportunity possibility.

Q41. What Is Control Factor?

These elements were taken into consideration via the private groups even as elevating additional price range and planning the capital shape. In this corporation pl to raise long time price range by using issue the equity and choice shares. It does not have relation with the borrowed capital.

Q42. What Is Flexibility Principle?

Flexibility Principle: this precept deals with capital structure that could have additional requirements of funds in destiny.

Q43. What Is Cost Of Debt?

It is used to measure the fee of capital. This is the primary factor which must be calculated within the starting to discover the fee of capital. It consists of both contractual price and imputed fee. It is defined as the specified price of return that an investment which is debt has to yield to defend the shareholder's hobby.

Q44. Explain Cost Of Capital And Its Importance?

Cost of the capital is the charge of return that is minimal which needs to be earned on investments on the way to fulfill the buyers of numerous kinds who're making investments inside the organisation within the shape of stocks, debentures and lo. It is used in economic investment which refers back to the value of a organization's price range or the shareholders return on the enterprise's existing deals. It is the required fee that a agency ought to reap to cover the cost of producing budget within the marketplace. By seeing this only the investor invests the money inside the agency if the organisation is giving the required rate of return. It is a tenet to measure the profitability of various investments.

The importance of fee of capital is that it's far used to evaluate new mission of organisation and permits the calculations to be easy in order that it has minimum go back that investor expect for imparting investment to the business enterprise. It has such an significance in monetary decision making.

It actually utilized in managerial choice making in sure area which include-

Decision on capital budgeting- It is used to degree the funding concept to pick a mission which satisfies return on investment.

Used in designing corporate monetary shape- it's miles used to layout the marketplace fluctuations and try to reap the economical capital structure for firm.

Top management overall performance- It evaluates the monetary performance of pinnacle executives. It involves the comparison of actual income of the tasks and taken projects typical fee.