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problem1:  As debt is substituted for equity in the capital structure and the debt ratio increase, the behavior of the overall cost of capital is partially describeed by;

[A] The reduction in risk as perceived by the common share holders

[B] The decrease in the cost of equity

[C] The tax-deductibility of interest payments

[D] The increase in the number of common shares outstanding

problem2:  As fixed operating costs increase and all other factors are held constant, the degree of operating leverage will

[A] Remain unchanged

[B] Change in an undetermined direction

[C] Increase

[D] Decrease

problem3: The conflict resulting from a managers desire to increase the firm's risk without increasing current borrowing costs and lenders desire to limit lending is one effect of the ______________ problem.

[A] Capital

[B] Variable cost

[C] Agency

[D] Leverage

problem4: The major short coming of the EBIT-EPS approach to capital structure is that

[A] The technique only considers leverage – related risk

[B] The technique does not maximize earnings per share

[C] The technique does not promote the maximization of shareholders wealth.

[D] The technique does not consider the cost of capital.

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