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Financing Decision Interview Questions & Answers - Learning Mode
COOLINTERVIEW.COM FINANCIAL MANAGEMENT INTERVIEW QUESTIONS FINANCING DECISION INTERVIEW QUESTIONS QUESTIONS & ANSWERS - LEARNING MODE

Financing Decision Interview Questions & Answers - Learning Mode

Decisions concerning the liabilities and stockholders' equity side of the firm's balance sheet, such as a decision to issue bonds. It is an important decisions where a business concern has to take maximum care in financing different proposals. The appropriate mix of finance with debt to equity directly contributes to the profitability of a business unit.

Try Financing Decision Interview Questions & Answers - Exam Mode

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Financing Decision Interview Questions & Answers - Learning Mode
Try Financing Decision Interview Questions & Answers - Exam Mode
Question: What is operating leverage?

Answer: Operating leverage is a measurement of the degree to which a firm or project incurs a combination of fixed and variable costs. Operating leverage measures a company?s fixed costs as a percentage of its total costs. It is used to evaluate the break even point of a business. It is calculated as follows:
Operating Leverage= Contribution/ EBIT Source: CoolInterview.com
Question: What is leverage?

Answer: Leverage is defined as the tendency for profits to change at a faster rate than sales. It is a relationship between equity share capital and securities and creates fixed interest and dividend charges. It is also known as gearing. Leverage is a cost depicting tool. Source: CoolInterview.com
Question: What is combined leverage?

Answer: Combined leverage 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. This leverage shows the relationship between a change in sales and the corresponding variation in taxable income.
It is calculated as follows:
Combined Leverage= Financial Leverage* Operating Leverage
OR
Combined Leverage= Contribution/ Earning Befo Source: CoolInterview.com
Question: What is business risk?

Answer: The term business risk refers to the possibility of inadequate profits or even losses due to uncertainties e.g., changes in tastes, preferences of consumers, strikes, increased competition, change in government policy, obsolescence etc .Every business organization contains various risk elements while doing the business. Business risks implies uncertainty in profits or danger of loss and the events that could pose a risk due to some unforeseen events in future, which causes business to fail. For Source: CoolInterview.com
Question: What do you mean by financial risk?

Answer: Financial risk The risk that the cash flow of an issuer will not be adequate to meet its financial obligations. Also referred to as the additional risk that a firm's stockholder bears when the firm uses debt and equity. Source: CoolInterview.com
Question: State the differences between operating and financial leverage.

Answer: 1. Operating Leverage: Operating leverage is related to the investment activities whereas
financial leverage is more concerned with financial matters.
2. Operating leverage is used to predict business risk whereas financial leverage is used to analyse the financial risk. Source: CoolInterview.com
Question: What are the internal factors affecting capital structure?

Answer: The internal factors affecting capital structure are as follows:
1. Financial Leverage
2. Risk
3. Growth and stability
4. Retaining growth
5. Cost of capital
6. Cash Flows
7. Flexibility
8. Purpose of finance
9. Asset structure
Source: CoolInterview.com
Question: Name the types of leverages.

Answer: The types of leverages are:
a) Financial Leverage
b) Operating Leverage
c) Combined Leverage Source: CoolInterview.com
Question: What is financial leverage?

Answer: Financial leverage is a tool with which a financial manager can maximise the returns to the equity shareholders.Financial leverage refers to the use of debt to acquire additional assets. Financial leverage is also known as trading on equity. It is also referred as the degree to which an investor or business is utilizing borrowed money. Financial leverage is also known as trading on equity. It is calculated as follows:
Financial Leverage= Operating Income(EBIT)/ Taxable Income(EBT).
Source: CoolInterview.com
Question: State the external factors affecting capital structure.

Answer: External factors affecting capital structure are as follows:
1. Size of the Company
2. Nature of Industry
3. Investors
4. Cost of Floatation
5. Legal Requirements
6. Period of Finance
7. Level of Interest Rate
8. Level of Business Activity
9. Availability of Funds
10. Taxation Policy
11. Level of Stock Prices Source: CoolInterview.com
Question: What is capital structure of an undertaking?

Answer: The capital structure or the capitalisation of an undertaking refers to the way in which its long-term obligations are distributed between different classes of owners and creditors. The capitalisation of an enterprise depends on its expected average net income. Source: CoolInterview.com
Question: What is the master way (table) for calculating the leverages?

Answer: Sales xxx
Less: Variable Cost xxx
Contribution xxx
Less: Fixed Cost xxx
Operating Profit/ Earnings Before
Interest and Tax(EBIT) xxx
Less: Interest xxx
Earnings Before Tax(EBT) xxx
Less: Tax xxx
Earnings After Tax(EAT) Source: CoolInterview.com

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