Consider a set of firms that have lost money in the past and that have net operating losses (NOLs) that can be used to decrease their taxable income in future years. Given just this information about these firms, which of the following is the best advice you could provide about their current financing choices?

1.These firms should not have much debt because the benefits of the debt tax shield are likely to be small.

2.These firms should not have much debt because they are likely to go bankrupt.

3.These firms should have a lot of debt because they could use the additional tax shield.

4.These firms should have a lot of debt because they have positive NPV projects to fund.