1.) A capital structure decision concerns

Select one:

a.how much capital is needed to invest in positive net present value projects.

b.the mix of debt and equity used to finance a firm's operations.

c.the evaluation of projects based on their estimated cash flows and net present values.

d.the ranking of capital in terms of riskiness and the choice based on this ranking.

e.the organizational structure that will allow a firm to obtain the best cost of capital.

2.) ____________ states that the value of a firm is independent of the firm's debt-equity mix in its capital structure.

Select one:

a.M&M Proposition I with taxes

b.M&M Proposition I without taxes

c.M&M Proposition II with taxes

d.M&M Proposition II without taxes

e.The static theory of capital structure

3.) Let Tb = personal tax rate on interest received, Ts = personal tax rate on dividends, and Tc = corporate tax rate on earnings. If (1 - Tb) is greater than the product of (1 - Tc) and (1 - Ts),

Select one:

a.the corporation has incentive to use equity.

b.the corporation must pay higher interest on its debt.

c.the shareholder would not buy equity.

d.the corporation has incentive to increase financial leverage.

e.the corporation will not be able to invest in all its positive net present value projects.

4.) Aceline Corporation is currently all-equity financed, with a cost of capital of 15% and firm value of $10 million. The company is considering a $2 million debt issue at 8% interest rate. The money raised will be used to repurchase shares. The company's marginal tax rate is 32%. According to the M&M Proposition, what is Aceline's WACC after the debt issue?