Q1

a)

Which one of the following statements is true regarding financial slack? Financial Slack:

		allows firms to take advantage of good investment opportunities
		is always associated with high leverage
		reduces agency problems for the firm
		increases the need for managers to seek external financing

b)

According to the Trade-Off Theory of Debt Policy, beyond a certain point of debt financing, increasing debt further will do all of the following EXCEPT:

		cause stockholders to demand a higher return.
		cause investors to demand a higher interest rate on debt.
		increase the risk to the firm's common stockholders.
		decrease the firm's cost of common equity.

c)

Tax Effect. Which one of the following statements is TRUE. An increase in a corporation's tax rate will cause:

		a decrease in an unleveraged firm's cost of equity.
		an increase in the value of an unleveraged firm.
		a decrease in a leveraged firm's WACC.
		an increase in a leveraged firm's cost of debt.