1. Question 6

   The equity beta of a levered firm is 1.70. The beta of debt is 0.5. The firm's market value debt to equity ratio is 0.6. What is the asset beta if the tax rate is zero?

   1. 0.87

   2. 1.00

   3. 1.12

   4. 1.25

   5. 1.39

2. Question 7

   The present value of the interest tax shield is the same regardless of whether the firm plans to borrow permanently or temporarily.

   1. True
   2. False
3. Question 8

   The right to default is valuable to shareholders.

   1. True
   2. False
4. Question 9

   4 Points

   According to the trade-off theory, more profitable firms should have more debt and thus higher debt ratios on average.

   1. True
   2. False
5. Question 10

   The pecking order theory of capital structure predicts that

   1. firms prefer equity to debt financing.

   2. firms prefer financing by debt versus internally generated cash.

   3. if two firms are equally profitable, the more rapidly growing firm will end up borrowing more, other things equal.

   4. high-risk firms will end up borrowing more.

   5. every firm has an optimal capital structure