Behavioral Capital Structure Interview Questions & Answers:

1. What is Miller's hypothesis with corporate and personal taxes?

Miller's hypothesis with corporate and personal taxes : This approach gives important advantage over equity. This ignores bankruptcy and agency costs.

2. What is Trade-off theory?

Trade-off theory: costs and benefits of leverage.

3. What is MM hypothesis with and without corporate tax?

MM hypothesis with and without corporate tax : This approach tells that firm's value is independent of capital structure. The same return can be received by shareholders with the same risk.

4. What is Traditional approach and Net income (NI) approach?

Traditional approach and Net income (NI) approach :- this is an approach in which both cost of debt, and equity are independent of capital structure. The components which are involved in it are constant and don't depend on how much debt the firm is using.

5. What is Net operating income (NOI)?

Net operating income (NOI):- this is an approach in which both value of the firm and weighted average cost are independent of capital structure. Individual holding the debt and equity receives the same cash flows without worrying about the taxes as they are not involved in it.

6. Explain Combined Leverage?

it is a leverage which refers to high profits due to fixed costs. It includes fixed operating expenses with fixed financial expenses. It indicates leverage benefits and risks which are in fixed quantity. Competitive firms choose high level of degree of combined leverage whereas cooperative firms choose lower level of degree of combined leverage.

7. What is Combined Leverage?

it is a leverage which refers to high profits due to fixed costs. It includes fixed operating expenses with fixed financial expenses. It indicates leverage benefits and risks which are in fixed quantity. Competitive firms choose high level of degree of combined leverage whereas cooperative firms choose lower level of degree of combined leverage.

8. What is Financial Leverage?

It is a leverage which refers to high level of profitability because of high fixed financial expenses. It includes interest on loan and preference dividend. Higher financial leverage indicates higher financial risk as well as higher break points. In this kind the managers have flexibility in choice of capital structure.

9. What is Operating Leverage?

it is a leverage which refers to the enhancement of profits because there is a fixed operating cost which is involved with each and every component. When the sales increases fixed cost doesn't increase and it results in higher profits. Higher fixed expenses results in higher operating leverage which leads to higher business risk.

10. What is Timing Principle?

Timing Principle: this principle deals with capital structure which should be able to have market opportunities and which should be able to minimize cost of raising funds and obtain the savings.