As the level of debt increases that tax benefits of debt increase until
a. interest costs exceed dividend payments.
b. tax shield benefit exceeds distress costs.
c. raw material costs exceed dividend payments.
d. employee costs exceed interest expense.
Leverage can __________ a firm's expected earnings per share, but by doing so it is not necessary that it will increase the share price.
a. decrease
b. dilute
c. increase
d. not change
Which of the following would increase a firm's financial leverage?
a. an increase in depreciation
b. an increase in interest expense
c. an increase in the number of shares of common stock outstanding
d. a and b
Which of the following statements is FALSE?
a. While debt itself may be cheap, it increases the risk and therefore the cost of capital of the firm's equity.
b. Although debt does not have a lower cost of capital than equity, we can consider this cost in isolation.
c. We can use MM Proposition I to derive an explicit relationship between leverage and the equity cost of capital.
d. The total market value of the firm's securities is equal to the market value of its assets, whether the firm is unlevered or levered.