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1) Which of the following is not a reason that firms appear to prefer to use internal equity in the form of retained earnings as their financing choice?

	a.	There is no cost of equity associated with using internal equity.
	b.	External equity dilutes the shareholder base and internal equity does not.
	c.	There are no issuance (flotation) costs to using retained earnings and external financing requires additional costs.
	d.	Managers value flexibility and control, external sources of financing can put constraints on both.

2) Which of the following is not a result of the work of Modigliani and Miller related to Capital Structure?

	a.	The weighted average cost of capital is unaffected by changes in the capital structure.
	b.	The frim can make its investment decisions independent of its financing decision.
	c.	The value of the leveraged firm is not equal to the value of the unleveraged firm.
	d.	The value of the firm if it is all equity financed will be not change at any level of debt.

3) Which of the following is one of the characteristics that defines the debt of a firm?

	a.	It does not have a tax advantage from its payments.
	b.	It creates a contractual claim with a fixed life.
	c.	It provides management control to the holder.
	d.	It is a residual claim on the firm and does not have priority in bankruptcy.

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