1. Which of the following is true regarding financial leverage?
A) Increasing financial leverage will always increase the EPS for stockholders.
B) The level of financial leverage that produces the highest WACC is the one most beneficial to stockholders.
C) When a firm increases its debt and decreases its equity, its leverage declines.
D) When a firm buys back some of its outstanding shares of common stock, its leverage increases.
2. Select the incorrect statement below regarding bankruptcy costs.
A) The costs of uncertainty associated with corporate default are flotation costs.
B) The explicit costs associated with corporate default, such as legal expenses, are the direct bankruptcy costs.
C) The implicit costs associated with corporate default, such as lost sales, are the indirect bankruptcy costs.
D) The explicit and implicit costs associated with corporate default are also called the financial distress costs.