QUESTION 1 According to M&M;, if the tax rate=0% then OA. O B. The optimal capit

Question

QUESTION 1 According to M&M;, if the tax rate=0% then OA. O B. The optimal capital structure is all equity OC. WACC increases when leverage increases Total firm value is independent of capital structure .The optimal capital structure is all debt QUESTION 2 If the manager increases the firm's D/E ratio The firm's stock will have a higher expected return and less risk. The firm's stock will have a lower expected return and more risk. The firm's stock will have a higher expected return and more risk. The firm's stock will have a lower expected return and less risk.

Explanation / Answer

In case of zero taxes, the firm is independent of capital structure

If D/E ratio is increased, the stock will have higher expected return and more risk

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