What does the pecking order theory postulate?

A.The optimal capital structure is the point at which the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress.B.The optimal capital structure is dependent upon the effective tax rate.C.The optimal capital structure is a highly leveraged firm because of the tax shield.D.There's no optimal debt-equity ratio; instead, a firm's capital structure is determined by its need for external financing.

Dagwood, Inc. has a weighted average cost of capital (ignoring taxes) of 16 percent. It can borrow at 6 percent. Dagwood has a target capital structure of 40 percent equity and 60 percent debt. Using the M&M Proposition II, what's the cost of equity?

A.29 percentB.15 percentC.31 percentD.21 percent

A higher debt level usually equates to a

A.smaller tax shield and decreased financial risk.B.smaller tax shield and increased financial risk.C.larger tax shield but increased financial risk.D.larger tax shield and decreased financial risk.

US. Treasury bills are paying about 0.2 percent, and the estimated market risk premium (based on large common stocks) is about 8 percent. Apple (AAPL) has an estimated beta of 1.44. Using the SML approach, what's the return on equity of Apple stock?

A.11.72 percentB.11.32 percentC.10.32 percentD.11 percent

Which of the following istrueabout a firm with no equity financing?

A.The return on equity = cost of debtB.The return on equity = WACCC.The cost of debt = WACCD.The after-tax cost of debt = WACC

SLG Corp. is an all-equity firm with a weighted average cost of capital of 9.68 percent. The current market value of the equity is $27 million, and the tax rate is 35 percent. What is EBIT?

A.$4,095,385B.$2,821,194C.$1,730,300D.$6,180,000