1. The MM theory with taxes implies that firms should issue maximum debt. In practice, this is not true because:
a. Debt is more risky than equity.
b. Bankruptcy is an advantage to debt.
c. Firms will incur large agency costs of short term debt by issuing long term debt.
d. None of these are correct
2. Given realistic estimates of the probability and cost of bankruptcy, the future costs of a possible bankruptcy are borne by:
a. All investors in the firm.
b. Debtholders only because if default occurs interest and principal payments are not made.
c. Shareholders because debtholders will pay less for the debt providing less cash for the shareholders.
d. Management because if the firm defaults they will lose their jobs.
e. None of the other answers.