1. Based on the tradeoff theory of capital structure, at what point is the value of the firm maximized?

a) at a debt ratio of 100%

b) when the advantage of leverage is equal to the after-tax cost of debt

c) when the benefits of leverage is offset by higher interest rates and cost of financial distress

d) at a debt ratio of 0%

2. Which of the following securities could NOT have any benefits for diversification with your investment? portfolio?

A. Alpha Company stock that has a correlation coefficient of −0.25 with your portfolio

B. Beta Company stock that has a correlation coefficient of 0.50 with your portfolio

C. Treasury bills with a correlation coefficient of 0.0 with your portfolio

D. All of these choices would reduce risk for your portfolio and therefore show at least some benefit to diversification.

Please explain WHY