Question 1: Answer the following questions: (12 Marks) 1. If a firm went from zero debt to successively higher levels of debt, why would you expect its share price to first rise, then hit a peak and then begin to decline? (2 Marks) Answer: 2. What is business risk? What factors influence a firm's business risk? (2 Marks) Answer: percent debt. 3. Consider two hypothetical firms: Firm U, which uses no debt financing, and Firm L, which uses 10,000 of 12 Both firms have 20,000 in assets, a 40 percent tax rate, and an expected EBIT of 3,000. Construct partial income statements, which start with EBIT, for the two firms. (3 Marks) Answer: Firm U Firm L Assets 20,000 20,000 Equity 20,000 10,000 3,000 EBIT 3,000 INT (12%) Mark) EBT Taxes (40%) (1 Mark) NI (1 Mark)