Which of the Following Statements Is CORRECT

question 42

Multiple Choice

Which of the following statements is CORRECT?

• A) The capital structure that maximizes the stock price is also the capital structure that minimizes the cost of equity from retained earnings (r_S).
• B) The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share.
• C) The capital structure that maximizes the stock price is also the capital structure that maximizes the firm's times interest earned (TIE)ratio.
• D) If a company increases its debt ratio,this will typically increase the marginal costs of both debt and equity,but it still may reduce the company's WACC.
• E) If Congress were to pass legislation that increases the personal tax rate but decreases the corporate tax rate,this would encourage companies to increase their debt ratios.

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Definitions:

Face Value

The nominal value printed on a bond or security, representing the amount due at maturity.

Stated Interest Rate

The annual interest rate declared on a financial instrument, such as a loan or bond, not necessarily reflecting fees or compounding.

Market Rate

The prevailing interest rate available in the marketplace on investments, loans, and deposits, determined by supply and demand factors.

Discount on Bonds Payable

The amount by which a bond's selling price is less than its face value.