Which of the Following Statements Is CORRECT

question 63

Multiple Choice

Which of the following statements is CORRECT?

• A)In general, a firm with low operating leverage also has a small proportion of its total costs in the form of fixed costs.
• B)There is no reason to think that changes in the personal tax rate would affect firms' capital structure decisions.
• C)A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else equal.
• D)If a firm's after-tax cost of equity exceeds its after-tax cost of debt, it can always reduce its WACC by increasing its use of debt.
• E)Suppose a firm has less than its optimal amount of debt.Increasing its use of debt to the point where it is at its optimal capital structure will decrease the costs of both debt and equity financing.

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Definitions:

Stockholders' Equity

Funds contributed by the shareholders plus the company's earnings retained over time, reflecting the ownership value in the firm.

Market Rate

The prevailing interest rate available in the marketplace on investments or loans.

Coupon Interest Rate

The annual interest rate paid on a bond’s face value by the issuing entity, also known as the nominal rate.

Bond Issued At Premium

Occurs when a bond's selling price is higher than its face value, indicating investor confidence or lower-than-average interest rates.