Let Tb = personal tax rate on interest received, Ts = personal tax rate on dividends, and Tc = corporate tax rate on earnings. If (1 Tb) is greater than the product of (1 Tc) and (1 Ts),

Select one:

a. the corporation has incentive to use equity.

b. the corporation must pay higher interest on its debt.

c. the shareholder would not buy equity.

d. the corporation has incentive to increase financial leverage.

e. the corporation will not be able to invest in all its positive net present value projects.

With the presence of bankruptcy costs, the optimal capital structure occurs when

Select one:

a. the WACC equals the shareholders' required rate of return.

b. the unlevered rate of return equals the levered rate of return.

c. the incremental interest tax shields from an increase in debt equal the increased bankruptcy costs.

d. the bankruptcy costs equal the unlevered cost of capital.

e. the firm's beta equals zero.