15. Firms Little and Big have different cost structures. Little has low fixed costs, Big has high fixed costs. They sell the same product in the same market and have the same sales of 1 million units. Both sell their product for $10 per unit. Little has a variable cost of $6 per unit and fixed costs of $2 million. Big has variable costs of $3 per unit and fixed costs of $5 million. Which one of the following statements is TRUE?

a. Big probably uses more labor than does Little.

b. If unit sales decrease by the same amount for both companies, Big's EBIT would decrease less than Little's EBIT.

c. If unit sales increase by the same amount for both companies, Big's EBIT will increase more than Little's EBIT.

d. Because they face the same sales risk, Big and Little are equally risky.

e. Because Little's variable costs are higher, it is less profitable.

16.Which one of the following statements is TRUE?

a. Other things held constant, if corporate tax rates declined, then the Modigliani-Miller with taxes tradeoff theory would suggest that firms should decrease their use of debt.

b. A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt.

c. The capital structure that minimizes the firm's cost of debt is also the capital structure that maximizes its earnings per share.

d. If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its WACC.

e. The capital structure that minimizes a firm's weighted average cost of capital is also the capital structure that minimizes its probability of financial distress.