Which one of the following statements is TRUE?

a$.$ The optimal capital structure occurs when the weighted average cost of capital is minimized.

b$.$ The signaling theory of capital structure says that managers will signal their intentions publicly

before they make major capital structure changes.

c$.$ The market timing theory of capital structure implies that managers will issue equity in a

recession, when interest rates are low, and debt in a boom period, when interest rates are rising.

d$.$ The pecking order theory of capital structure says that only the highest executives in the pecking

order hierarchy will make capital structure decisions.

e$.$ An agency problem occurs when someone working with you defies your specific instructions and

you can't fire them because of their importance to the organization

Which one of the following statements is TRUE?

a$.$ Modigliani and Miller's model with taxes says that the value of a levered firm is the value of an

unlevered firm minus the present value of the firm's interest expenses.

b$.$ When bankruptcy occurs, the costs of financial distress are paid to the bondholders.

c$.$ Firm value is maximized when the capital structure is chosen to minimize the costs of financial

distress.

d$.$ The signaling theory of capital structure says that issuing equity is a signal of a firm's good

prospects because equity is so expensive to issue.

e$.$ The market timing theory of capital structure says that managers will issue stock when they

think stock prices are high.

Which one of the following statements is TRUE?

a$.$ Other things held constant, if corporate tax rates declined, then the Modigliani$-$Miller with taxes

tradeoff theory would suggest that firms should decrease their use of debt.

b$.$ A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of

retained earnings is not zero, its cost is generally lower than the after$-$tax cost of debt.

c$.$ The capital structure that minimizes the firm's cost of debt is also the capital structure that

maximizes its earnings per share.

d$.$ If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must

reduce its WACC.

e$.$ The capital structure that minimizes a firm's weighted average cost of capital is also the capital

structure that minimizes its probability of financial distress