. True / False Questions:

11. U.S. corporations are likely to prefer external capital over dividends on their own

investments.

12. The "information content of dividends" says that dividend increases send good

news about cash flow and earnings, while dividend cuts send bad news.

13. Loan covenants can ensure that companies will accept all positive-NPV

investments and reject negative ones.

14. MM's proposition I states that the required rate of return on equity increases as the

firm's debt-equity ratio increases.

15. Under MM II assumptions, the expected return on equity is equal to the expected

return on assets for a levered firm.

16. The "trade-off theory" of capital structure suggests that firms have an optimal

level of debt.

17. When there are no taxes and capital markets function well, the market value of a

company depends on its capital structure. .

18. The pecking order theory of capital structure depicts that firms prefer external

financing to sending out signals that may affect the stock price.

19. Debt financing affects neither the business risk nor the financial risk of the firm.

20. The riskiness of equity securities typically exceeds that of debt securities for

firms.