1. Leverage becomes a disadvantage to a firm as soon as the firm's earnings before interest:
a. become negative.
b. exceed the break-even point.
c. are taxed.
d. exceed the firm's unlevered earnings.
e. fall below the break-even point.
2. An all equity firm has a cost of capital of 15 percent. The firm is considering switching to a debt-equity ratio of .65 with a pretax cost of debt of 7.5 percent. What will the firm's cost of equity be if the firm makes the switch? Ignore taxes.
11.25%
12.21%
16.67%
19.88%
21.38%