1. In perfect capital markets, how does the choice of leverage impact firm value?
a. In perfect capital markets, leverage decreases firm value by increasing the the risk to equity.
b. In perfect capital markets, leverage increases firm value because debt costs less than equity.
c. In perfect capital markets, leverage increases firm value because interest is tax deductible.
d. In perfect capital markets, leverage does not affect firm value.
2. Which of the following is true about agency considerations in finding the optimal capital structure for a firm?
a. The optimal level of debt is determined by trading off the benefits of deducting interest from taxes and the costs of financial distress.
b. Through their control of management, stockholders will take more risk than what is in bondholders' interest.
c. Outside equity costs more than debt, and debt costs more than retained earnings due to information asymmetry. Therefore, finance project with retained earnings first, debt second, and outside equity last.
d. No answer text provided.
3. In perfect capital markets, how does leverage affect the cost of equity?
a. In perfect capital markets, levered equity's cost increases with the debt-equity ratio.
b. In perfect capital markets, leverage increases the cost of levered equity by the corporate bond spread.
c. In perfect capital markets, leverage has no effect on the cost of levered equity.
d. In perfect capital markets, the cost of levered equity will be less the cost of unlevered equity.