1. Assuming no corporate taxes, the independence hypothesis suggests that a firm's weighted average cost of capital will
a. remain constant because the cost of equity will be increasing as the amount of debt increases due to the increased risk.
b. remain constant regardless of capital structure because the cost of debt and the cost of equity are the same.
c. increase proportionally with the increase in the amount of debt a firm uses.
d. decrease proportionally with the increase in the amount of debt a firm uses.
2. The EBIT-EPS indifference point
a. identifies the sales level at which EBIT equals EPS.
b. identifies the EBIT level at which the EPS will be the same regardless of the financing plan.
c. identifies the point at which the analysis can use EBIT and EPS interchangeably.
d. identifies the level of earnings at which the management is indifferent about the payments of dividends.