1.The MM theory with corporate taxes implies that firms should issue maximum debt. In practice, this is not true because:

1. in general, debt carries a higher cost of capital than equity.
2. bankruptcy risk is a disadvantage to debt.
3. the usage of debt signals weak financial prospects.
4. firms will incur higher transaction costs in issuing debt than equity.

a.I, II, III, and IV.

b.I and II only.

c.I and IV only.

d.II only.

e.III and IV only.

2.According to the tradeoff theory, other things equal, the optimal capital structure will tend to includemoredebt for firms with:

a.less taxable income.

b.higher depreciation deductions.

c.higher marginal tax rate.

d.higher interest rate.

e.higher probability of financial distress.

3.Which of the following statements is/are correct concerning takeover defenses?

1. A firm can use targeted repurchase to thwart a potential unfriendly takeover attempt.
2. A classified board makes it more difficult for a hostile bidder to change the entire board abruptly.
3. When triggered, a poison pill enables shareholders other than the hostile bidder to purchase shares at a discount, making itprohibitively costly for the hostile bidder to obtain control of the target.
4. A white knight is a friendly suitor that a target firm turns to as an alternative to a hostile bidder.

a.I and IV only

b.I, III, and IV only

c.I, II, and IV only

d.I, II, III, and IV

e.II and III only

4.Which of the following statements about capital structure theories is/are correct?

1. The trade-off theory of capital structure predicts that, other things equal, profitable firms should borrow less than unprofitable ones.
2. The trade-off theory of capital structure predicts that, other things equal, firms facing high costs of financial distress should borrow less than those facing low costs of financial distress.
3. The pecking order theory of capital structure predicts that, other things equal, firms prefer debt financing over equity financing.
4. The pecking order theory of capital structure predicts that, other things equal, profitable firms should borrow more than unprofitable ones.

a.I and II only

b.I, III, and IV only

c.I, II, and IV only

d.II only

e.II and III only