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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.