Question 1:The Modigliani and Miller (MM) proposition 2 highlights the fact that, as the level of debt in a company's capital structure rises, the expected return on the company's assets RISES, FALLS OR REMAINS THE SAME? while the required return on equity RISES, FALLS OR REMAINS THE SAME?.

Question 2: Default risk is the risk of a company not being able to pay back its debt.

a) Default risk IS OR IS NOT recognised in Earnings Before Interest and Tax (EBIT)-Earnings Per Share (EPS) analysis.

b) Default risk is an important consideration in EBIT/EPS analysis because it means that:

having high levels of debt will generate an overinflated EPS figure

maintaining low levels of debt is often impossible

issuing shares will always be preferable to issuing debt

issuing more debt to maximise EPS will not always be beneficial

Question 3: The trade-off theory of capital structure implies that for a company incorporating both debt and equity into its capital structure:

there exists a trade-off between total expenses and debt levels.

the company should try to eliminate all debt from the capital structure.

the more debt the company issues, the less risky it becomes.

there exists an optimal leverage level for that company.

Question 4: The tax savings on interest for a company that incorporates debt into its capital structure is equal to:

company tax rate x interest expense

debt interest rate x taxable income

(1 - company tax rate) x interest expense

(1 - debt interest rate) x taxable income