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1. Which one of the following statements is the core principle of M&M Proposition I without taxes? A. A firm's cost of equity is directly related to the firm's debt-equity ratio. B. A firm's WACC is directly related to the firm's debt-equity ratio. C. The interest tax shield increases the value of a firm. D. The capital structure of a firm is totally irrelevant because the value of the firm stays the same. E. Levered firms have greater value than unlevered firms. 2. M & M Proposition I with tax supports the theory that: A. a firm's weighted average cost of capital increases as the firm's debt-equity ratio increases. B. the value of a firm is inversely related to the amount of leverage used by the firm. C. the value of a levered firm is equal to the value of an unlevered firm plus the value of the interest tax shield. D. a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm. E. a firm's cost of equity increases as the debt-equity ratio of the firm decreases. 3. Based on M & M Proposition II with taxes, the weighted average cost of capital: A. is equal to the after-tax cost of debt. B. is equal to the cost of equity capital. C. is unaffected by the tax rate. D. decreases as the debt-equity ratio increases. E. is equal to Ru x (1 - Tc). 4. The trade-off theory of capital structure advocates that the optimal capital structure for a firm: A. is dependent on a constant debt-equity ratio over time. B. remains fixed over time. C. is independent of the firm's tax rate. D. is independent of the firm's weighted average cost of capital E. equates the tax savings from an additional dollar of debt to the increased bankruptcy costs related to that additional dollar of debt. 5The unlevered cost ofcapital refers to the cost of capital for: A. A privately owned entity. B. An all-equity firm. C. A governmental entity D. A private individual E. A corporate shareholder

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