FOR TRUE OR FALSE

1. The optimal capital structure also maximizes the earnings per share of shareholders.

2. Due to the tax shield, it makes debt more attractive source of financing.

3. The use of fixed cost sources of funds, such as debt and preferred stock affects a firms operating leverage.

4. A firm is considering the purchase of assets that will increase its fixed operating costs. The firm should decrease the proportion of equity it employs in its capital structure if it wants to maintain its existing degree of total leverage.

5. Financial leverage causes a firms Net Income to change at a rate greater than the change in Operating Income.

6. The greater the variability of costs, the greater the business risk of the firm which is reflected in the companies selling price.

7. The determinant of the degree of financial leverage is the amount of interest the company pays.

8. The tax deductibility of the interest payments on corporate debt is known as tax shield.

9. The optimal capital structure is the mix of debt, preferred stock and common equity that minimizes the weighted average cost of the firms employed capital.

10.Generally the higher a firms business risk , the higher the amount of financial leverage that will be used in the optimal structure

11. With operating leverage, a change in EBIT will cause a change in sales

12. Financial leverage benefits shareholders when the return on assets is greater than the cost of debt.

13. The use of increasing amounts of total leverage decreases the risk of financial distress.

14. With financial leverage, a change in EBIT will cause a change in net income.

15. Investors required returns and the cost of equity capital increases as the relative amount of debt used to finance the firm decreases.