The course: Corporate Finance

1. What does the pecking order theory postulate?

A. There’s no optimal debt-equity ratio; instead, a firm’s capital structure is determined by its need for external financing.
B. The optimal capital structure is a highly leveraged firm because of the tax shield.
C. The optimal capital structure is the point at which the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress.
D. The optimal capital structure is dependent upon the effective tax rate.

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2. Which cost is an indirect cost of bankruptcy to the firm?

A. Legal costs associated with the bankruptcy
B. Loss of sales from people not wanting to buy a product from a bankrupt company
C. Administrative costs not associated with the bankruptcy
D. Administrative costs associated with the bankruptcy

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