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15. Which of the following factors favor the issuance of equity in the financing decision? I. Market signaling II. Distress costs III. Bankruptcy costs IV. Financial flexibility A. I only B. II and III C. II, III, and IV D. I and IV 16. According to the pecking order theory, which of the following are correct? I. For financing needs, firms prefer to first tap internal sources, such as retained earnings II. There is an inverse relationship between a firm's profit level and its debt level. III. Firms prefer to issue new equity rather than source external debt. IV. Firms should aim to reach a target debt-ratio in the long-run. A. II and IV B. I and III C. I and II D. I, II, and IV 17. According to the pecking order theory of capital structure, why do firms avoid issuing equity? A. Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall B. Because fees associated with issuing new equity are so high C. Because they want to avoid dilution of earnings per share D. Because they don't want to commit to paying dividends on the new equity 18. Which of the following statements is MOST correct? A. No matter if a firm pays dividend or not, the cost of common stock is normally bigger than cost of debt. B. Because the cost of debt is lower than the cost of equity, value-maximizing firms maintain debt ratios of close to 100%. C. Corporations that are 100% equity financed will have a much lower weighted average cost of capital because the lack of debt lowers their risk of bankruptcy. D. The cost of capital on any source of capital, is always equal to the required rate of return on that source. 11. Which one of the following statements is true? 1. The pecking yder thexyy suggests that only firms will outstanding profitability should consider issuing equity to obtain capital B. The fact that debt financing is gencrally cheaper than equity financing is only due to the impact of tax When a company is in financial distress, its shareholders may have an incentive to undertake excessively risky investments D. A company incurs costs of financial distress only after declaring bankruptcy. 12. Increase in financial leverage 1. increases expected ROE but does not affect its variability, II. increases expected return and risk to owners. III. decreases times interest eamed. IV. reduces sustainable growth rale A. Il cinly B. I and III C III and IV D. IL and m 13. The term "Unancial distress costs' includes which of the following? 1. Bankruptcy cost II. Indirect coet m. Conflicts of interest IV. Flotation costs A. III and II B. Tand IT C. Iland D. and TV 14. Which of the following factors favor the issuance of debt in the financing decision? 1. Market signaling IL. Distress custs 111. Tax benefits IV. Financial flexibility A. I, IL and IV B. I and III C II and IV D. III and IV

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