1. Assume the Modigliani Miller assumptions hold true and there is no taxation. When you increase the financial leverage of a company, the expected return on equity increases because the volatility of the cash flow from the company's assets increases. Is it true? Why? [4 Points] 2. In the presence of bankruptcy costs, the overall value of the firm assets always decreases when I increase the financial leverage, as by increasing the debt-to-equity ratio, it becomes more likely for the firm to run into bankruptcy which, in turn, increases the expected bankruptcy costs. Is this true? Why? [4 Points] 3. The CEO of Company A just sent a letter to the stockholders announcing that she is planning to merge with Company B. The main result of such merger will be a much more stable (less variable) stream of cash from the resulting firm. You hold risky debt previously issued by company A. Should you be happy, unhappy or indifferent about the upcoming merger? Why? [4 Points]