1. Which statement is false?

a. The WACC is the expected return on the firm's capital budgeting projects of average risk.

b. Financial Risk is the additional risk resulting from the use of debt.

c. Financial Distress costs are costs that occur when a company is in trouble, bt before it goes bankrupt. These costs can be thought of as "the last straw" in that they help to push a company into bankruptcy.

d. According to the tradeoff models of capital structure, the WACC is minimized at the optimal capital structure

2. Which statement is False?

a. Adding debt will increase the firm's ROE as long as the cost of debt is lower than their Basic Earning Power.

b. The level of debt does NOT affect the business risk of a firm.

c. If a company increases its level of debt, then its Net Income will increase

d. According to the tradeoff model of capital structure, the costs of debt and equity will both rise as the level of debt increases.

3. In the lease versus buy decision, leasing is often preferable

a. if the firm is unable to borrow funds at a low rate.

b. if the firm needs a specific piece of equipment that only has value to that firm.

c. Because lease obligations do not affect the riskiness of the firm.

d. if the lessee has a higher tax rate than the lessor