1) For every 1 percent decrease in sales of a firm, the EBIT decreases by 3.2 percent. What does this statement indicate?

a.The debt/assets ratio of the firm is 3.2 times.

b.The degree of operating leverage of the firm is 3.2 times.

c.The current assets of the firm are 3.2 times its current liabilities.

d.The expenses of the firm are 3.2 percent of its income.

e.The degree of financial leverage of the firm is 3.2 times.

2) According to the trade-off theory, under which of the following conditions will a firm's capital structure be optimal?

a.Marginal bankruptcy-related costs = 0

b.Marginal tax shelter benefits - Marginal bankruptcy-related costs = Interest charges

c.Debt/assets ratio = Marginal tax shelter benefits

d.Marginal tax shelter benefits = Marginal bankruptcy-related costs

e.Marginal tax shelter benefits = Interest charges