1. The pecking order of financing is followed by firms is

A) first retain earnings, second debt, and third external equity

B) first debt, second retained earnings, and external equity as the last resort because external equity is the most expensive

C) first debt, second external equity, and retained earnings as the last resort because retained earnings can be used to pay dividends

D) first internal equity, second external equity, and debt as the last resort because debt can lead to bankruptcy

2. Which of the following statements is CORRECT?

A) Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its WACC

B) Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this action still may raise the company's WACC

C) Increasing a company's debt ratio will typically increase the marginal cost of both debt and equity financing. However, this action still may lower the company's WACC

D) Since a firm's beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity