1. Company A and Company B have the same EBIT, tax rate, total assets, and Cost of Debt. However, Company A has a higher debt ratio than Company B. Which of the following statements is correct? (ROA = Net Income / Assets and ROE = Net Income / Equity)

a. Company A has a higher net income than Company B.

b. Company A has a lower ROE than Company B.

c. Company A has a lower ROA than Company B.

d. The two companies have the same ROE.

2. If a manager is pessimistic about the future prospects of the firm, but do NOT want to signal that information, then they should __________.

a. Issue debt to increase liquidity b. Issue more equity c. Repurchase Stock d. Pay a large dividend

3. Which of the following statements is CORRECT?

a. Firms with more liquid assets, which tend to have lower bankruptcy costs, tend to use less debt.

b. If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.

c. An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure.

d. An increase in the company's degree of operating leverage is likely to encourage a company to use more debt in its capital structure.

4. Which of the following statements is CORRECT?

a. Increasing financial leverage is one way to increase a firm's basic earning power (BEP).

b. Firms with lower fixed costs tend to have greater operating leverage.

c. The debt ratio that maximizes EPS generally exceeds the debt ratio that maximizes share price.

d. If a company were to issue debt and use the money to repurchase common stock, then this should cause the company's return on assets to increase.