Question1: As debt is substituted for equity in the capital structure and the debt ratio increase, the behavior of the overall cost of capital is partially explained by;
[A] The reduction in risk as perceived by the common share holders
[B] The decrease in the cost of equity
[C] The tax-deductibility of interest payments
[D] The increase in the number of common shares outstanding
Question2: As fixed operating costs increase and all other factors are held constant, the degree of operating leverage will
[A] Remain unchanged
[B] Change in an undetermined direction
[C] Increase
[D] Decrease
Question3: The conflict resulting from a managers desire to increase the firm's risk without increasing current borrowing costs and lenders desire to limit lending is one effect of the ______________ problem.
[A] Capital
[B] Variable cost
[C] Agency
[D] Leverage
Question4: The major short coming of the EBIT-EPS approach to capital structure is that
[A] The technique only considers leverage – related risk
[B] The technique does not maximize earnings per share
[C] The technique does not promote the maximization of shareholders wealth.
[D] The technique does not consider the cost of capital.