85. Two firms that are virtually identical except for their capital structure are selling in the market at different values. According to M&M

a) one will be at greater risk of bankruptcy.

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

c) this proves that markets cannot be efficient.

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

22 | P a g e

86. What is the value of the tax shield if the value of the firm is $5 million, its value if unlevered would be $4.78 million, and the present value of bankruptcy and agency costs is $360,000?

a) $140,000

b) $220,000

c) $360,000

d) $580,000

87. Reserves & Surplus are which form of financing?

a) Security Financing

b) Internal Financing

c) Loans Financing

d) International Financing