The best capital structure is the one that sets the debt-to-equity ratio equal to 1. maximizes expected cash flows. ignores the false comfort of financial flexibility. results in the lowest possible financial distress costs. Question 15 (2 points) The basic lesson of the M\&M theory is that the value of a firm is dependent upon the firm's capital structure. the total cash flows of the firm. the size of the stockholders' claims. Which of the following are helpful for evaluating the effect of leverage on a company's risk and potential returns? I. Estimated pro forma coverage ratios II. The recognition that financing decisions do not affect firm or shareholder value III. A range of earnings chart IV. A conservative debt policy that obviates the need to evaluate risk I only III only I and III only IV only Question 17 ( 2 points) Which of the following factors favor the issuance of debt in the financing decision? 1.Market signaling 2.Distress costs 3.Tax benefits 4.Financial flexibility