1. In the perfect capital market (but only with corporate taxes), the optimal capital structure is using debts as much as possible. [ True / False ]

2. Operating Leverage indicates the degree to which a project (or a firm) has the fixed cost (FC). Specifically, Degree of Operation Leverage (DOL) can be measured as follows:

%change in OCF = DOL % change in Q

DOL = 1 + FC/OCF where OCF is Operating Cash Flows and Q is quantities unit sales.

( The above box is true. Answer the following proposition.) In general, the higher the operating leverage, the lower the break-even point. [ True / False ]

3. In the efficient capital market with corporate taxes and bankruptcy costs, when the equity- debt (D/E) ratio increases, the firms WACC decreases and then increases again after some point. [ True / False ]

4. Pecking-order theory suggests that, when the firm raises capital, the management prefers internal equity the most, debt next, and external equity finally. [ True / False ]