1. Which of the following statements regarding a firm's optimal capital structure is true?
a. The optimal capital structure maximizes the firm's cost of debt
b. The optimal capital structure minimizes the firm's weighted avg. cost of capital (WACC)
c. The optimal capital structure maximizes the firm's earnings per share (EPS)
d. The optimal capital structure maximizes the firm's cost of equity
2. Review the list and identify which items are correct
a. An increase in the risk of bankruptcy is likely to reduce the firm's free cash flows in the future
b. an increase in debt financing beyond a certain point is likely to increase the cost of equity
c. risk of bankruptcy increase management spending on perquisites and increase agency cost
d. the pretax cost of debt increases as the firm's risk of bankruptcy increases