Which of the Following Events Is Likely to Encourage a Company

question 70

Multiple Choice

Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?

• A) An increase in the personal tax rate.
• B) An increase in the company's operating leverage.
• C) The Federal Reserve tightens interest rates in an effort to fight inflation.
• D) The company's stock price hits a new high.
• E) An increase in the corporate tax rate.

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Definitions:

Interest Rate

The cost of borrowing money or the amount paid for the use of funds, expressed as a percentage of the principal.

Effective Annual Rates

The effective annual rate (EAR) is the actual interest rate that an investment earns due to compounding over a given period, usually one year.

Nominal Rate

The interest rate before adjustments for inflation, representing the face value of financial products.

Compounded Monthly

A method of calculating interest where the accrued interest is added to the principal sum at the end of each month, leading to "interest on interest."