QUESTION 1

What should a firm's target capital structure do? A. Minimize the weighted average cost of capital B. Minimize the cost of debt C. Minimize the cost of equity D. Maximize earnings per share

QUESTION 2

We use the __ cost of debt in the calculation of the weighted average cost of capital since interest payments __.

A. after-tax; are fixed

B. before-tax; are fixed

C. before-tax; are made to bondholders, not the IRS

D. after-tax; are tax deductible

QUESTION 3

The static (or trade-off) theory of capital structure recommends to ___.

A. use no debt B. use only debt

C. use more debt while the PV of the interest tax shield is less than the PV of distress costs

D.use more debt while the PV of distress costs is less than the PV of the interest tax shield