1. The central issue in the study of leverage is:

a. whether leverage affects stock price.

b. whether an optimal capital structure exists that maximizes stock price.

c. whether an optimal capital structure exists that minimizes the cost of capital.

d. All of the above

2. The cost of capital is used primarily in:

a. capital budgeting because it reflects what the firm pays for the money it invests.

b. negotiations with investment bankers because it establishes an overall return on which the market can base prices for the firm's securities.

c. negotiations with banks because it reflects the company's overall borrowing power.

d. setting the firm's basic risk level.