Question 4 Debt is cheaper than equity because dividends are tax deductible and interest payments are not. debtors have a lower claim to assets at liquidation than do shareholders. debt is less risky than equity. dividend payments on common share are optional. Which of the following is not considered an advantage of debt? Investors react positively to debt issues Debt creates a tax shield Moderate amounts of debt reduce bankruptcy risk Issuing debt requires less administrative work than issuing equity Which of the following statements is correct? Investors are more likely to forgive companies for cutting dividends if these companies have many opportunities for positive NPV projects. Investors are less likely to forgive companies for (B) cutting dividends if these companies have many opportunities for positive NPV projects. Investors are more likely to punish companies for (C) cutting dividends if these companies have many opportunities for positive NPV projects. Investors are more likely to punish companies for issuing equity if these companies have many opportunities for positive NPV projects. Question 5 Which one of the following statements concerning financial leverage is correct? The benefits of leverage are unaffected by changes in a firm's earnings before interest and taxes. Financial leverage is always beneficial to a firm B when the interest rate on the debt is less than 10 percent. A firm employing leverage will always have a (C) higher earnings per share than a firm which does not employ leverage. If a firm employs financial leverage, the shareholders will be exposed to greater risk. Which of the following statements is correct? Investors usually react positively to companies issuing equity because it signals that the management are confident in their ability to pay dividends to new investors. Investors usually react negatively to companies (B) issuing debt because it signals that the value of firm's shares are not high enough to issue shares. Investors usually react negatively to companies cutting dividends because it signals that the management is not confident in company's earnings potential. (D) None of the above.

1. Question 4 Debt is cheaper than equity because dividends are tax deductible and interest
payments are not. debtors have a lower claim to assets at liquidation than do shareholders. debt is
less risky than equity. dividend payments on common share are optional.
Which of the following is not considered an advantage of debt? Investors react positively to debt
issues Debt creates a tax shield Moderate amounts of debt reduce bankruptcy risk Issuing debt
requires less administrative work than issuing equity
Which of the following statements is correct? Investors are more likely to forgive companies for
cutting dividends if these companies have many opportunities for positive NPV projects.
Investors are less likely to forgive companies for (B) cutting dividends if these companies have
many opportunities for positive NPV projects. Investors are more likely to punish companies for
(C) cutting dividends if these companies have many opportunities for positive NPV projects.
Investors are more likely to punish companies for issuing equity if these companies have many
opportunities for positive NPV projects.
Question 5 Which one of the following statements concerning financial leverage is correct? The
benefits of leverage are unaffected by changes in a firm's earnings before interest and taxes.
Financial leverage is always beneficial to a firm B when the interest rate on the debt is less than
10 percent. A firm employing leverage will always have a (C) higher earnings per share than a
firm which does not employ leverage. If a firm employs financial leverage, the shareholders will
be exposed to greater risk.
Which of the following statements is correct? Investors usually react positively to companies
issuing equity because it signals that the management are confident in their ability to pay
dividends to new investors. Investors usually react negatively to companies (B) issuing debt
because it signals that the value of firm's shares are not high enough to issue shares. Investors
usually react negatively to companies cutting dividends because it signals that the management is
not confident in company's earnings potential. (D) None of the above