3. Which of the following statements is true?

a. The interest tax shield is the amount of interest the company pays to its bond holders.F

b. The trade-off theory of capital structure trades off the increased risk of changes in sales against the increased risk of the costs of raw materials.

c. In the Modigliani Miller Model with taxes for capital structure, the value of a levered firm is the value of an unlevered firm plus the value of the debt. F

d. Leverage adds value to an unlevered firm by reducing the taxes the federal government receives from the firm.

e. The signaling theory of capital structure says that managers choose the level of debt to have in their company based on signals they receive from the market.