1. An increase in a firm's financial leverage will:
A. increase the variability in earnings per share.
B. always reduce the operating risk of the firm.
C. increase the value of the firm in a non-MM world.
D. increase the WACC.
2. Assume a firm is financed with 30% debt on which it pays 9%. What is the expected return on equity if the expected return on assets is 14%?
3. The trade-off theory of capital structure describes the optimal capital structure for any firm as being the level of debt that:
A. minimizes the financial distress costs.
B. maximizes the present value of the interest tax shield.
C. equates the present values of the interest tax shield and the financial distress costs.
D. maximizes the after-tax cash flows that are internally generated.