1. As a firm adds more debt to its capital structure:

a. its financial risk increases

b. its weighted average cost of capital tends to decrease and then at some point increase.

c. it is substituting lower cost debt for higher cost equity financing

d. all of the above

2.Which of the following is most desirable for a given firm?

a. high operating leverage

b. low operating leverage

c. high financial leverage

d. low financial leverage

e. the answer depends on the characteristics of the firm being examined.

3.What kind of company is least likely to make large dividend payments to its shareholders?

a. large, old, established companies

b. manufacturing companies

c. new, rapidly growing companies investing in new technologies

d. companies with lots of business in foreign countries

4. Which of the following is most important in determining a company's ability to pay a dividend?

a. the amount of its net income

b. the amount of cash it has

c. the amount of equity it has

d. the amount of its sales.

5. According to the clientele dividend theory

a. every company should pay a small, or no, dividend

b. companies should assess the preferences of their shareholders for dividends and then consistently implement a dividend policy that meets those preferences

c. every company should pay a large dividend

d. dividend payment policies should vary greatly from year to year