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1. The costs of financial distress are the primary reason firms don't increase their leverage to 90% or 100%. (True or False)

2. When investment choices have different effects for equity holders than for debtholders, the CEO may make decisions :

A. that increase leverage

B. that lower distress costs

C. that benefit equity holders at the expense of debtholders

D. that reduce variable costs

3. The indirect costs of bankruptcy are _____ than the direct costs of bankruptcy.

A. larger

B. smaller

C. equal to

4. Firms with a high proportion of plant, property, and equipment (PP&E) have ____ financial distress costs than firms with a lower proportion of PP&E.

A. higher

B. lower