1. According to the trade-off theory of capital structure, the optimal mix of debt and equity is the level at which

A) the benefit of tax savings exceeds the cost of financial distress

B) the cost of equity equals the cost of debt

C) the firm's EPS is maximized

D) the benefit of leverage and the cost of financial distress lead to the lowest level of cost of capital to the firm.

2. According to M&M, in a world with taxes

A) the value of the firm declines due to the taxes associated with interest on new debt

B) the value of the firm increases due to the value of tax savings associated with debt

C) the tax benefit of debt is offset by the increased cost of equity leading to no change in the WACC and the value of the firm

D) the deductibility of interest for tax purposes leads to lower earnings and stock prices