1. Which statement is TRUE?

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

b. The level of debt does NOT affect the financial risk of a firm.

c. If a company increases its level of debt, then its Net Income will increase

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

2. Which of the following statements about warrants and convertibles is TRUE?

a. A convertible bond allows the firm to buy back the bond prior to maturity

b. One primary difference between warrants and convertibles is that convertibles bring in additional funds to the firm when exercised while warrants reduce debt

c. The coupon rate on convertible debt is higher than the coupon rate on similar straight debt because convertibles are riskier.

d. Warrants and Convertibles are used by corporations in order to get a lower rate on their debt.

3. Which statement about leases is TRUE?

a. Leasing is often preferable if the firm needs a specific piece of equipment that only has value to that firm.

b. Sale Leaseback arrangements are often done due to tax purposes

c. Operating leases must be reported on the balance sheet

d. Under operating leases, the lessee expects to buy or keep the asset after the lease ends.