Which of the Following Statements Is CORRECT

question 2

Multiple Choice

Which of the following statements is CORRECT?

• A) The capital structure that maximizes the stock price is generally the capital structure that also maximizes earnings per share.
• B) All else equal, an increase in the corporate tax rate would tend to encourage a company to increase its debt ratio.
• C) Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC.
• D) Since debt is cheaper than equity, increasing a company's debt ratio will always reduce its WACC.
• E) When a company increases its debt ratio, the costs of equity and debt both increase.Therefore, the WACC must also increase.

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Definitions:

Double Declining Balance

A method of accelerated depreciation which doubles the depreciation rate of the straight-line method, resulting in higher depreciation expenses in the earlier years of an asset's life.

Intangible Assets

Non-physical assets that hold value, such as patents, trademarks, and goodwill.

Intangible Assets

Non-physical assets that possess value due to their intellectual or non-material nature, such as patents, trademarks, and goodwill.

Depreciation Method

A systematic approach used to allocate the depreciable amount of an asset over its useful life, such as straight-line or declining balance methods.