Match List I with List II

List I

Capital Structure
Preposition(s)

List II

Description(s)

A.

Target Capital structure

I.

Expected yield on the equity
capital is equal to the pure
equity return plus a premium
for financial risk

B.

Optimum Capital Structure

II.

It refers to the perceived costs
due to increased ratio of debt in
the firm.

C.

Cost of financial distress

III.

It is the debt ratio the firm strives
to achieve

D.

MM preposition-II

IV.

It is the debt-equity ratio that
maximises the value of the firm.

Choose the correct answer from the options given below:

Question

Question

This question was previously asked in

UGC Paper 2: Commerce_17th Oct 2020 Shift 1

Answer 1

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Capital Structure Preposition	Description
A. Target Capital structure	The target capital structure refers to the mix of debt, preferred stock, and common equity that the company is striving to attain. In other words, it is the debt ratio the firm strives to achieve.
B. Optimum Capital Structure	It refers to the best mix of debt-equity financing that maximizes the company's overall market value while minimizing its cost of capital. In other words, it is the debt-equity ratio that maximizes the value of the firm.
C. Cost of financial distress	The more debt a company will use to finance its operations, the more will be the chances of increased financial distressed cost. It refers to the perceived costs due to an increased ratio of debt in the firm.
D. MM preposition-II	Proposition -II of MM theory states that the cost of equity is directly related and incremental to the percentage of debt in the capital structure. The expected yield on the equity capital is equal to the pure equity return plus a premium for financial risk.

Therefore, it is clear from the above explanation that option 2) is the correct answer.

	List I Capital Structure Preposition(s)		List II Description(s)
A.	Target Capital structure	I.	Expected yield on the equity capital is equal to the pure equity return plus a premium for financial risk
B.	Optimum Capital Structure	II.	It refers to the perceived costs due to increased ratio of debt in the firm.
C.	Cost of financial distress	III.	It is the debt ratio the firm strives to achieve
D.	MM preposition-II	IV.	It is the debt-equity ratio that maximises the value of the firm.