MODULE III

FINANCING DECISION
QUESTIONS FOR PRACTICE
A. Short Answer Type (1 mark each) (Answer in a word or a sentence)
1. Define capital structure.
2. Define capitalisation.
3. Define financial structure.
4. What is optimum capital structure?
5. What is trading on equity?
6. What is capital gearing?
7. What is leverage?
8. What is financial leverage?
9. What is degree of financial leverage?
10. What is operating leverage?
11. What is degree of operating leverage?
12. What is combined leverage?
B. Paragraph type (2 marks each) (Answer in a short paragraph consisting of
about 50 word.
1. State the importance of capital gearing.
2. Distinguish between capital structure and capitalisation.
3. Differentiate between financial structure and capital structure.
4. What is the difference between favourable and unfavourable financial leverage?
5. What is the importance of operating leverage?
6. What is the relation between fixed cost and operating leverage?
7. Distinguish between operating leverage and financial leverage.
C. Short essay Type. (4 marks each) (Answer in a paragraph consisting of
about 100 words or 4 or 5 points with explanation)
1. What is capital structure? What are the factors determining capital structure?
2. What is optimal capital structure? What are the essentials or requisites of capital
structure?
3. Explain the importance of optimal capital structure decision.
4. What is financial leverage? What are its characteristics?
5. What is the relationship between debt financing and financial leverage?
6. “Financial leverage is a two-edged sword” – Elucidate.
7. What are the advantages and disadvantages of financial leverage?
8. What are the advantage and disadvantages of financial leverage?
9. How operating leverage is helpful in capital budgeting decisions?
D. Long Essay Type. (15 marks each) (Answer not to exceed 3 pages)
1. What do you mean by capital structure? What are the major determinations of
capital structure?
2. What is meant by financial leverage? How does it magnify the earnings available
for equity shareholders?
3. “Financial leverage acts as a lever to magnify the influence of fluctuations of
operating income on EPS” Comment on this statement with suitable examples.
4. Distinguish between operating leverage and financial leverage. Explain the
effects of financial leverage on EPS and financial risk.
5. Write a comprehensive note on the importance of leverages.
6. What is operating leverage? How does it help in magnifying revenue of a firm?