Question

1. To build a new factory in San Diego which costs $20 million dollars, your company decided to issue $14 million value of new bonds and $6 million value of new stock. This decision is an example of a;

long-term investment decision

capital structure decision

short-term investment decision

capital budgeting decision

daily operating decision

2. Choose one that correctly states

Trademarks and patents are highly liquid

For a decision making, market value is more important than book value

To be a healthy company, equity should be more than debt

Liabilities are a residual claim against a company’s asset

Average tax rate is the portion of total tax payment out of total revenue

3. Suppose your company’s ROA is 11% and ROE is also 11%, then, your company:

also has a current ratio of 10

has no debt of any kind

has no net working capital

is using its assets as efficiently as possible

has an equity multiplier of 2

4.

Your company’s long-term debt at the beginning of the year is $250 and total debt is $340. At the end of the year, long-term debt is $280 and total debt is $350. The interest paid is $30. What is the amount of the cash flow to creditors?

$70

$0

$30

-$30

$60

5. Your company’s long-term debt at the beginning of the year is $250 and total debt is $340. At the end of the year, long-term debt is $280 and total debt is $350. The interest paid is $30. What is the amount of the cash flow to creditors?

$70

$0

$30

-$30

$60

Answer 1

1. Capital structure decision is a decision about various component which will be combined to form the overall capital for a project, so it will be inclusive of various kinds of equity financing and debt financing in order to have a better capital structure which would be optimum mix for the company.

This project has been funded by a mix of equity capital and debt capital. It is an example of capital structure decision.

All the other statements are false as it is capital structure decision.

Correct answer is option (B). Capital structure decision.