Multiple Choice. Circle the best response. 2 points each.

1. A firms income tax rate has decreased in 2018.

a. Its cost of debt capital will increase.

b. Its cost of debt capital will decrease.

c. Its cost of common equity capital will increase.

d. Its cost of common equity capital will decrease.

2. The optimum capital structure is the one which results in the

a. the highest weighted average cost of capital.

b. more equity than debt.

c. less equity than debt.

d. the lowest weighted average cost of capital.

3. Assume a firm increases long-term liabilities in its capital structure. If the bankruptcy effect is greater than the tax effect,

a. the weighted average cost of capital will increase.

b. the weighted average cost of capital will decrease.

c. the weighted average cost of capital will not change.

d. the weighted average cost of capital may increase or decrease.