What is the optimal capital structure aimed at achieving?

The optimal capital structure aims to lower the cost of capital and maximize the value of the firm.

The Net Income Approach assumes that the cost of debt remains ___ regardless of the level of debt.

Constant

How does the stability of earnings influence a company's capital structure?

Stability of earnings affects debt levels.

• Stable earnings support higher debt.

• Predictable income aids interest payments.

• Unstable earnings lead to cautious borrowing.

True or False: The Modigliani and Miller Approach asserts that a firm's capital structure affects its overall value.

False: The Modigliani and Miller Approach states that capital structure is irrelevant to a firm's overall value.

What factor does a company consider if it wishes to retain control while raising capital?

The company may opt for debt financing or preference shares instead of issuing equity shares, as equity issuance dilutes ownership.

Fill in the blank: The degree of operating leverage measures the sensitivity of a company’s operating income to changes in ___ sales.

Sales

Which approach suggests that a firm's value is determined solely by its operating income and investment risk?

The Net Operating Income (NOI) Approach.

What is the primary criticism of the Net Income Approach?

It assumes that the cost of debt remains constant and ignores the risk perception changes of equity shareholders with increasing leverage.

How does government policy affect a company's capital structure decisions?

Government regulations can impact the cost and availability of financing options, influencing whether companies choose debt or equity.

What does the debt-equity ratio indicate in a company's capital structure?

The debt-equity ratio indicates the proportion of debt financing relative to equity financing in a company's capital structure.

True or False: A higher debt-equity ratio signifies a lower financial risk for a company.

False: A higher debt-equity ratio typically signifies higher financial risk due to increased obligations to pay interest.

What is the significance of the debt-equity ratio in determining a company's capital structure?

The debt-equity ratio indicates capital structure.

• Shows creditor vs. shareholder funding.

• Higher ratio means more risk involved.

• Lower ratio suggests reduced financial risk.