1. Which of the following about capital structure is correct? a) In a frictionless market, borrowing debt brings additional value to the firm. b) If there is no bankruptcy cost, tax increases firm value by the amount of the present value of interest tax shield. c) Firms should use more debt if bankruptcy costs are higher. d) None of the above. 2. Which of the following about capital structure is incorrect? a) Debt increases the risk of equity. b) Cost of capital is higher if we consider the bankruptcy cost. c) If there is no bankruptcy cost, a firm will prefer debt to equity if the tax rate is higher. d) None of the above. 3. Suppose an investment that promises to pay $10,500 in one year is offered for sale for $9,500. Your interest rate is 5%. If you invest in this project, the NPV of your investment is a) 1000 b) 500 c) 1050 d) 750 4. Suppose the nominal interest rate is 8%, inflation is 3%, what is the real interest rate? a) 4.85% b) 5.00% c) 4.52% d) 2.03% 5. Given the following zero-coupon bond yields, compare the yield to maturity for a three-year, zero-coupon bond; a three-year coupon bond with 4% annual coupons; and a three-year coupon bond with 10% annual coupons. All of these bonds are default free. Which of the following statement is incorrect? a) The collection of zero-coupon yields is the yield curve. b) The present value of the three-year coupon bond with 4% coupon is greater than 876.29 . c) Yield to maturity and discount rate are the same for zerocoupon bonds. d) The present value of the three-year coupon bond with 10% coupon is less than 1000