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BUSFINN > Week 16 > Flashcards

Week 16 Flashcards

1
Q

referred as the degree of debts in the financing or capital of a business firm

A

CAPITAL STRUCTURE

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2
Q

refers to a systematic approach to financing business
activities through a combination of equities and liabilities.

A

CAPITAL STRUCTURE THEORY

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3
Q

is the amount of debt that an entity uses to buy more assets.

A

FINANCIAL LEVERAGE

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4
Q

Financial leverage has two primary advantages

A

Enhanced earnings.
Favorable tax treatment.

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5
Q

Financial leverage may allow an entity to
earn a disproportionate amount on its assets

A

Enhanced earnings

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6
Q

In many tax jurisdictions, interest
expense is tax deductible, which reduces its net cost to the
borrower.

A

Favorable tax treatment.

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7
Q

Financial leverage formula

A

Total debt/share holders equity

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8
Q

is a measurement of the degree to which a firm or project
incurs a combination of fixed and variable costs.

A

OPERATING LEVERAGE

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9
Q

A business that makes more sales, with each sale providing a very high gross margin, is
said to be highly leveraged. TRUE OR FALSE

A

FALSE

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10
Q

A business that makes many sales, with each sale
contributing a very slight margin is said to be less leveraged. TRUE OR FALSE

A

TRUE

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11
Q

A business that has a less proportion of fixed costs and a lower proportion of variable costs is said to have used more operating leverage. TRUE OR FALSE

A

FALSE

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12
Q

Those businesses with lower fixed costs and higher
variable costs are said to employ less operating leverage. TRUE OR FALSE

A

TRUE

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13
Q

It consists of the equity and debt capital.

A

Capital Mix

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14
Q

preference either for payment of interest or payment of dividends

A

Terms and Conditions

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15
Q

the most important consideration in the selection of the appropriate currency in which such
international loans are granted and accepted is the exchange risk factor.

A

Selection of Currency of the Debt

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16
Q

The profile of the instruments used in the capital mix may differ from each other. In the
same manner the priorities of the instruments also differ

A

Profile and Priority

17
Q

Financial innovative instruments are used to attract investors and they are
normally associated with reduction in capital cost

A

Various Financial Instruments

18
Q

The different target groups in any financial market could be individual investor, institutional
investors, private companies and corporates, public companies and corporates etc.

A

Various Target Groups in Financial Market

19
Q

A financial capital structure frame work can be structured and evaluated from various
perspectives

A

Capital Structure Frame Work

20
Q

It is used to help answer a firm’s financing choices.

A

FRICT Analysis

21
Q

The FRICT frame work consists of the following

A

Flexibility
Risk
Income
Control
Timing

22
Q

maximize the owners’ (share
holders’) wealth and value.

A

financial management

23
Q

Capital structure can be not changed by a company without incurring
transaction costs with ease and comfort and instantaneously. TRUE OR FALSE

A

FALSE

24
Q

High growth companies may prefer to take debts with lower maturities to keep interest rates down and to retain the financial flexibility since their performance can change unexpectedly at any point in time. They would also prefer unsecured debt to have flexibility

A

Growth Potential

25
Q

Tangible unencumbered fixed assets serve as a collateral security to debt. In the event of any unforeseen financial distress, the creditors can have recourse to these assets and they may be able to recover their debt by foreclosing such asset

A

Assets

26
Q

The tax provisions provide for deduction of interest paid on debt and therefore the debt
capital can increase the company’s after tax free cash flows. Therefore this interest
shield increases the value of the company.

A

Non debt and debt tax shields

27
Q

It is therefore prudent for the companies to maintain financial flexibility as this will enable the
companies to adjust to any change in the future events

A

Financial flexibility

28
Q

The creditors providing the debt capital would insist for restrictive covenants in the long
term loan agreements to protect their interest

A

Loan Agreements

29
Q

In designing a suitable capital structure, the management of the companies may decide
and desire to continue control over the companies and this is true, particularly in the case of first-generation entrepreneurs.

A

Control

30
Q

It is therefore prudent for the companies to maintain financial flexibility as this will enable the
companies to adjust to any change in the future events.

A

Issue Costs

31
Q

Capital Structure Determinants in Practice

A

Growth potential
Assets
Non debt and debt tax shields
Financial flexibility
Issue cost
Control
Loan agreements

BUSFINN (8 decks)

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