1-Different borrowers have different risks of bankruptcy, and bankruptcy is costly to lenders. Therefore, lenders charge higher rates to borrowers judged to be more at risk of going bankrupt.

True

False

2-If a firm utilizes debt financing, an X% decline in earnings before interest and taxes (EBIT) will result in a decline in earnings per share that is larger than X.

True

False

3-Whenever a firm borrows money, it is using financial leverage.

True

False

4-The trade-off theory states that the capital structure decision involves a tradeoff between the costs and benefits of debt financing.

True

False

5-Financial risk refers to the extra risk stockholders bear as a result of using debt as compared with the risk they would bear if no debt were used.

True

False

6-A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses.

True

False