1. The CEO of a company has suggested that the company should issue $350 mil worth of common stock and use the proceeds to reduce some of the company's outstanding debt. Assume that the company adopts this policy, and that total assets and operating income (EBIT) remain the same. The company's tax rate will also remain the same. Which is correct?

a. The company's net income will increase

b. The company's taxable income will fall

c. The company will pay less in taxes

d. Answer b and c are correct

e. Answer a and c are correct

2. Which is the correct answer?

a. The capital structure that maximizes expected Earning Per Share also expected maximizes the price per share common stock

b. A firm's business and financial risk are both unique to the firm and thus are completely diversifiable as non-systematic risk

c. Business risk will not affect a firm's beta because the beta is determined by the market and thus is outside the control of the firm

d. If a firm has no operating fixed cost (all operating costs will be variable), it will have business risk since any variability in operating profit (EBIT) will be exactly proportioned to changes in sales

e. No statement above is correct.