1. The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

a. true

b. false

2. According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

a. true

b. false

3. Which of the following statements concerning the compressed adjusted present value (APV) model is NOT CORRECT?

a. The value of a growing tax shield is greater than the value of a constant tax shield.

b. For a given D/S, the levered cost of equity using the compressed APV model is greater than the levered cost of equity under MM's original (with tax) assumptions.

c. For a given D/S, the WACC in the compressed APV model is less than the WACC under MM's original (with tax) assumptions.

d. The total value of the firm increases with the amount of debt.

e. The tax shields should be discounted at the unlevered cost of equity.