Page 2 - Home Assignment 4

4. ______ refers to number of time company’s earnings before interest and

taxes cover the interest payment obligation?
(a) Profitability ratio

(b) Amount of current assets
(c) Dividend

(d) Interest coverage ratios.
5. If return on investment is more than rate of interest then company must
prefer debt in its capital structure where as if return on investment is less

than rate of interest to be paid on debt, then company should avoid_____

(a) Legal constraints
(b) Investment in securities
(c) debt capital and depend upon the equity capital only

(d) None of the above.

Fill in the blanks.

1. Capital structure decision otherwise known as_____.

2. Financial leverage is otherwise called as________.

1 mark questions.

Q.1 what do you mean by financial leverage?

Q.2 How stock market conditions affect the capital structure decisions?

Q.3 How to calculate interest coverage ratio?

3 to 4 marks.

1. Explain the concept of financial leverage in detail.
2. How the stock market conditions influences the capital structure decisions.

State the reasons.

5 to 6 mark questions.

1. The directors of manufacturing company are thinking of issuing Rs.20 lacs

additional debentures for expansion of their production capacity. This will
lead to an increase in debt-equity ratio from 2:1 to 3:1. What are the risks