True or False? Explain briefly.

1. If firms did not have limited liability, their asset risk would be increased.

2. As long as the firm is certain that the return on assets will be higher than the interest rate, an issue of debt makes the shareholders better off.

3. In a perfect capital market, minimizing the weighted average cost of capital is equivalent to maximizing the firm's value.

4. MM's proposition II assumes increased borrowing does not affect the interest rate on the firm's debt.

5. Shareholders demand and deserve higher expected rates of return than bondholders do. Therefore, debt is the cheaper capital source. We can reduce the WACC by borrowing more.