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1. Based on the tradeoff theory of capital structure, at what point is the value of the firm maximized?
a) at a debt ratio of 100%
b) when the advantage of leverage is equal to the after-tax cost of debt
c) when the benefits of leverage is offset by higher interest rates and cost of financial distress
d) at a debt ratio of 0%
2. Which of the following securities could NOT have any benefits for diversification with your investment? portfolio?
A. Alpha Company stock that has a correlation coefficient of −0.25 with your portfolio
B. Beta Company stock that has a correlation coefficient of 0.50 with your portfolio
C. Treasury bills with a correlation coefficient of 0.0 with your portfolio
D. All of these choices would reduce risk for your portfolio and therefore show at least some benefit to diversification.
Please explain WHY
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