The following are two practice questions that will help prepare for the an upcoming quiz:

1) A junior financial analyst at a small firm and another junior analyst (Gonzaga graduate) suggests that the firm should leverage up (increase their D/A ratio) because the cost of debt is less than the cost of equity and, therefore, leveraging up will cause the firm's WACC to decrease and the firm's value to increase.How should the analyst respond?

2) According to the Static Tradeoff Theory, issuing debt has costs and benefits.Describe these costs and benefits associated with debt financing.Based on this theory, explain how the new tax law, that lowers corporate income tax rates, will impact the level of corporate borrowing.

Thank you!!!