Match the items of List-I with the items of List-II. List-IList-II (a) A theory of capital structure in…
Matching the capital structure theories gives: I. Capital Asset Pricing Model relates to (d) pricing risk; II. Traditional Approach posits an optimal (c) Capital structure…
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Match the items of List-I with the items of List-II.
| List-I | List-II |
|---|---|
| (a) A theory of capital structure in which the weighted average cost of capital and the total value of the firm remains constant as financial leverage is changed. | I. Capital Asset Pricing Model |
| (b) The value of the geared company will always be greater than an ungeared company with similar business risk but only by the amount of debt associated tax savings of the geared company. | II. Traditional Approach |
| (c) Capital structure that minimizes the firm’s cost of capital and thereby maximizes the value of the firm. | III. Net Operating Income Approach |
| (d) Share price is independent of the degree of financial leverage. | IV. Modigliani-Miller Theory and Corporate Taxation |
Answer and explanation
Correct answer B
Matching the capital structure theories gives: I. Capital Asset Pricing Model relates to (d) pricing risk; II. Traditional Approach posits an optimal (c) Capital structure that minimizes the firm's cost of capital and maximizes firm value; III. Net Operating Income (NOI) Approach holds that (a) WACC and total firm value remain constant as leverage changes; and IV. Modigliani-Miller Theory with Corporate Taxation (1963) holds that (b) the value of a geared firm exceeds an ungeared firm by the present value of debt tax shields. In I–IV order, this is (d), (c), (a), (b).
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UGC NET Commerce