Page 118 - DMGT409Basic Financial Management

Unit 6: Capital Structure Theory

6.11 Review Questions Notes

1. What is the relationship between leverage and cost of capital according to NI and NOI
approach?
2. What are the main propositions of MM approach?
3. There is nothing like optimum capital structure for a firm. Critically evaluate the

statement.
4. Write briefly a note on the arbitrage process.

5. Briefly explain the traditional approach of capital structure.

6. What do you mean by appropriate capital structure? What are the features?

7. Explain the factors that determine the capital structure for a fi rm.
8. Illustrate the arbitrage process with suitable example.
9. Write a note on Trade Off theory.
10. What are the key features of an optimum capital structure?

Answers: Self Assessment

1. NI approach 2. less

3. optimum capital structure 4. MM approach
5. equilibrium 6. optimum capital structure
7. EBIT-EPS approach 8. Cash fl ow approach
9. True 10. False
11. False 12. True

13. True 14. True
15. False

6.12 Further Readings

Books Chandra, P., Financial Management - Theory and Practice, New Delhi, Tata McGraw
Hill Publishing Company Ltd., 2002, p. 3.
Sudhindra Bhat, Financial Management, New Delhi, Excel Books, 2008.
Van Horne, J.C. and Wachowicz, Jr, J.M., Fundamentals of Financial Management,
New Delhi, Prentice Hall of India Pvt. Ltd., 1996, p. 2.

Online links http://www.fei.org/

www.scribd.com
www.globusz.com

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