1.Two firms that are virtually identical except for their capital structure are selling in the market at different values. According to Modigliani and Miller (M&M)

a. One will be at greater risk of bankruptcy.

d. This will not continue because arbitrage will eventually cause the firms to sell at the same value.

b. The firm with greater financial leverage will have the higher value.

c. This proves that markets cannot be efficient.

2.The cost of capital for a firm -- when we allow for taxes, bankruptcy, and agency costs

b. First declines and then ultimately rises with increasing levels of financial leverage.

c. Increases with increasing levels of financial leverage.

a. Remains constant with increasing levels of financial leverage.

d. Decreases with increasing levels of financial leverage.

3.When the manager of a firm uses capital structure changes to convey information about the profitability and risk of the firm, then the manager is engaging in __________.

b. informational symmetry

c. the net operating income approach to capital structure

a. financial signaling

d. the traditional approach to capital structure