A B C D E F G H | J K L M N Question #5 What do you think of the following statements? (TIPS: a few sentence for each should be enough; be as clear and specific as possible; sometimes a good counterexample could be helpful) P Q R A. "I'm not sure if it should make any difference to senior management whether the company is investing in more US stores, remodelling, or investing internationally. Shouldn't they want the same return?" B. "Recaps are always a good idea because they increase earnings per share." 0 C. "Retained earnings are just like free capital, so the cost of using them to finance investment is essentially zero." 1 2 D. "Equityholders don't care about bankruptcy costs because they always get nothing if the firm goes bankrupt anyways." 3. 4 E. "Since both the coupon and the principal repayment of a bond are fixed when the bond is issued, bond prices typically stay the same throughout the bond's life." 5. 6 F. "A firm behaving optimally will keep increasing leverage until its pretax income equals zero (i.e. its interest expense completely offsets its income)." 7 8 9 0 1 2 3 4 5 6 7