1. If a firm can shift its capital structure so as to change its weighted average cost of capital (WACC), which of the following results would be preferred?
a. The firm should try to decrease the WACC because such an action will increase the value of the firm.
b. The firm should try to increase the WACC because such an action will increase the value of the firm.
c. The firm should try to decrease the WACC because such an action will decrease the value of the firm.
d. The firm should try to increase the WACC because such an action will decrease the value of the firm.
e. The firm should not try to change the WACC because changing the WACC will not change the value of the firm.
2. The before-tax cost of debt, rd, is the same as the
a. average yield to maturity (YTM) associated with the firm's bonds.
b. dividend yield associated with the firm's common stock.
c. average coupon rate of the firm's bonds.
d. Re if the firm has no preferred stock.
e. the firm's marginal tax rate.