Q1. If the personal tax rate on stock dividends and the personal tax rate on bonds are the same, then $1000 in pretax earnings will give:

a. shareholders and bondholders the same rate of return

b. bondholders a greater rate of return than shareholders

c. shareholders a greater rate of return than bondholders

Q2. Capital market participants are skeptical of both debt and equity issues, making it more difficult to obtain outside financing at a reasonable price. As a result, firms should accumulate cash to fund future projects.

This is an argument made by the proponents of:

a. The Modigliani and Miller Propositions

b. Signaling Theory

c. The Static Trade-Off Theory

d. The Pecking-Order Theory