According to ________, the cost of equity capital is directly and proportionally related to capital structure.

• the static theory of capital structure

• M&M Proposition II

• M&M Proposition I

• the pecking-order theory

• the homemade leverage principle

• The business risk of a company:

• is dependent upon the relative weights of the debt and equity used to finance the company.

• is inversely related to the required return on the company's assets.

• is positively related to the company's cost of equity.

• has no relationship with the required return on a company's assets according to M&M theory.

• depends on the company's level of unsystematic risk.

• Homemade leverage is employed when a(n) ________:

• firm increases its level of debt.

• corporation uses debt exclusively to fund a corporate expansion project.

• corporation uses debt to pay dividends to shareholders.

• The existence of ________ makes the capital structure of a company irrelevant.

  a 100 percent dividend payout ratio

• taxes

• a debt-equity ratio that is greater than 0 but less than 1

• homemade leverage

• the interest tax shield

• investor uses debt to change his or her exposure to financial leverage.

• firm employs any amount of debt in its capital.