1) The cost of capital approach to estimating the optimal capital structure is considered unconstrained, which of the following may place a constraint on the analysis that prevents the frim from minimizing the cost of capital?

	a.	An increase in the cost of debt at the optimal level.
	b.	A decrease in the bond rating below investment grade at the optimal level.
	c.	An increase in the cost of preferred stock at the optimal level.
	d.	An increase in the cost of equity at the optimal level.

2) Which of the following is not shown by research on capital structure decisions?

	a.	Firms place a lower value on bankruptcy costs than theory suggests they should.
	b.	Firms value financial flexibility.
	c.	Firms worry about the dilution of share value when new equity is issued.
	d.	Firms pay a large amount of attention to the debt levels of other firms in the industry.

3) Which of the following illustrates an expected direct cost of bankruptcy?

	a.	Firms that sell durable products with long lives may see a decline in sales when the firm is considering bankruptcy.
	b.	Firms that declare bankruptcy must pay legal and administrative costs during the process.
	c.	Firms that sell products that require continuous service from the manufacturer may see a decline in sales when the firm is considering bankruptcy.
	d.	Firms that sell products where quality is an important attribute may see a decline in sales when the firm is considering bankruptcy.

4) Which of the following is not a factor that helps determine if the firm should increase the debt level to the optimal level quickly of slowly?

	a.	The degree of confidence in the estimate of the optimal level.
	b.	The likelihood of a takeover.
	c.	The difference between the current level of debt and the optimal level of debt.
	d.	The need for financial flexibility.