Which of the Following Statements Is CORRECT

question 22

Multiple Choice

Which of the following statements is CORRECT?

• A) A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, its
• Cost is generally lower than the after-tax cost of debt.
• B) The capital structure that minimizes a firm's weighted average cost of capital is also the capital structure that maximizes its stock
• Price.
• C) The capital structure that minimizes the firm's weighted average cost of capital is also the capital structure that maximizes its
• Earnings per share.
• D) If a firm finds that the cost of debt is less than the cost of
• Equity, increasing its debt ratio must reduce its WACC.
• E) Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff theory would suggest
• That firms should increase their use of debt.

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Definitions:

Marginal Revenue

The incremental profit made from the sale of an additional unit of a good or service.

Marginal Cost

The increment in overall expenses due to the output of one more unit of a product or service.

Marginal Revenue

The augmented income received from selling an extra unit of a good or service.

Total Revenue Curve

The total revenue curve graphically represents the relationship between total revenue gained by a business and the quantity of a product sold, showing how revenue changes as sales volume varies.