Miller and Modigliani claim that when debt is riskless and no income taxes exist:

cost of capital is minimized when a firm is financed strictly with common stock.

cost of capital is minimized when a company finances with 50% equity and 50% debt.

cost of capital is the same regardless of capital structure.

cost of capital is minimized when the firm finances strictly with debt.

The Oregon Lumber Co. has a debt-equity ratio of .60. The firm's required return on assets is 12 percent and its cost of equity is 14.4 percent. What is the pre-tax cost of debt based on M&M II with no taxes?

6.76 percent

7.00 percent

7.25 percent

7.40 percent

8.00 percent

As the volume of debt financing judiciously increases, the costs of the various types of financing will most likely __________; the firm's WACC will most likely ___________.

. increase; decrease

increase; increase

decrease; increase

decrease; decrease

A return series has an arithmetic mean of 10.5% and standard deviation of 13%. Assuming the returns are normally distributed what is the range of returns that aninvestor would expect to receive 68% of the time?

10.5% to 13%

-2.5% to 23.5%

-28.5% to 49.5%

-15.5% to 36.5%

0% to 36.5%