1. Which statement is False?

a. The WACC is the required return on the firm’s capital budgeting projects of average risk.

b. Financial Risk is the additional risk resulting from the use of debt.

c. According to the tradeoff models of capital structure, the Cost of Equity is minimized at the optimal capital structure.

d. Financial Distress costs are costs that occur when a company is in trouble, but before it goes bankrupt. These costs can be thought of as “the last straw” in that they help to push a company into bankruptcy.

2. Which Statement is False?

a. Default Risk is the likelihood that the company will go bankrupt prior to the bond’s maturity date.

b. AAA rated bonds pay the highest interest rates

c. The Cost of Debt is just the Yield to Maturity (or Yield to Call) on the firm’s bonds.

d. Discount bonds have a Yield to Maturity that is higher than its coupon rate.

3. Which statement is False?

a. Adding debt will increase the firm’s ROE as long as the cost of debt is less than their Basic Earning Power.

b. Firms with high levels of debt will have more business risk.

c. If a company increases its level of debt, then its Net Income will decrease d. According to the tradeoff model of capital structure, the costs of debt and equity will both rise as the level of debt increases.

d. According to the tradeoff model of capital structure, the costs of debt and equity will both rise as the level of debt increases.