1. Which of the following is a true statement regarding capital structures?

   	A.	Increasing the level of debt increases the firm's risk and therefore the equity beta decreases.
   	B.	Increasing the level of debt decreases the firm's risk and therefore the equity beta increases.
   	C.	Increasing the level of debt increases the firm's risk and therefore the equity beta increases.
   	D.	Increasing the level of debt decreases the firm's equity and therefore the equity beta decreases.

2. Which capital structure theory says that management's actions with respect to the amount of debt and equity that they choose to use, tells us something about their expectations for the firm?

   A.

   Pecking order theory

   B.

   Trade-off theory

   C.

   Debt financing as a managerial constraint

   D. Signaling Theory

   Why does the cost of debt increase for capital structures that use greater amounts of debt?

   	A.	Increasing the amount of debt, increases the riskiness so investors require a greater return to take on that risk.
   	B.	Increasing the amount of debt, decreases the riskiness so investors require a greater return to take on that risk.
   	C.	Increasing the amount of debt, increases the riskiness so investors require a smaller return and the cost of debt decreases.
   	D.	There is no correlation between amount of debt and cost of debt.

1. In today's environment, firms that intend to use debt should lock in long term interest rates now.

   True

   False