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Chapter 17
Capital Structure: Limits to the Use of Debt
Multiple Choice Questions
cost of capital.
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8. In a world with ta*es and financial distress, when a firm is operating with the optimal capital structure:
I. the debt-equity ratio will also be optimal.
II. the weighted average cost of capital will be at its minimal point.
III. the required return on assets will be at its ma*imum point.
IV. the increased benefit from additional debt is equal to the increased bankruptcy costs of that debt. 
A. I and IV only
B. II and III only
C. I and II only
D. II, III, and IV only
E. I, II, and IV only
9. The optimal capital structure will tend to include more debt for firms with: 
A. the highest depreciation deductions.
B. the lowest marginal ta* rate.
C. substantial ta* shields from other sources.
D. lower probability of financial distress.
E. less ta*able ine.
10. The optimal capital structure of a firm _____ the marketed claims and _____ the nonmarketed claims against the cash flows of the firm. 
A. minimizes; minimizes
B. minimizes; ma*imizes
C. ma*imizes; minimizes
D. ma*imizes; ma*imizes
E. equates; (leave blank)
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11. The optimal capital structure: 
A. will be the same for all firms in the same industry.
B. will remain constant over time unless the firm makes an acquisition.
C. of a firm will vary over time as ta*es and market conditions change.
D. places more emphasis on the operations of a firm rather than the financing of a firm.
E. is unaffected by changes in the financial markets.
12. The basic lesson of MM theory is that the value of a firm is dependent upon the: 
A. capital structure of the firm.
B. total cash flows of the firm.
C. percentage of a firm to which the bondholders have a claim.
D. ta* claim placed on the firm by the government.
E. size of the stockholders claims on the firm.
13. Corporations in the . tend to