1-In 1887, Holmes and Watson Detection Agency has an EBIT of $1,000 and must make annual interest payment of $125. What is the Agency's degree of financial leverage?

Multiple Choice

• 0.875

• 0.76

• 0.89

• 1.25

• 1.14

2-Optimal Capital Structure

Managers should view the concept of the Optimal Capital Structure as all of the following, except:

Managers should view the concept of the Optimal Capital Structure as all of the following, except:

Multiple Choice

• Firms that have substantial tax shields from other sources, such as depreciation, will get less benefit from leverage.

• The static model is not capable of identifying a precise optimal capital structure.

• The tax benefit from leverage is more important to firms that are in a tax-paying position.

• Firms with less risk of experiencing financial distress will borrow less.

• The higher the tax rate, the greater the incentive to borrow.