1. According to the trade-off theory of capital structure, the maximum value of the firm is obtained by trading off:
A. the book value of debt against the book value of equity.
B. the market value of debt against the market value of equity.
C. what outside investors know against what firm management knows
D. the present value of the interest tax shield against the present value of financial distress costs.
2. Real-world financial decision makers often use the internal rate of return (IRR) over the net present value (NPV) as their primary capital-budgeting decision tool because:
A. the IRR calculation is independent of the estimated hurdle rate whereas the NPV calculation is dependent upon the estimated hurdle rate.
B. the IRR calculation is dependent on the estimated hurdle rate whereas the NPV calculation is independent of the estimated hurdle rate.
C. the NPV calculation is subject to the borrowing/lending problem.
D. the IRR calculation is subject to the borrowing/lending problem.
E. the IRR calculation provides an exact estimate of the wealth created or destroyed.