Which of the Following Statements Is CORRECT, Holding Other Things

question 20

Multiple Choice

Which of the following statements is CORRECT, holding other things constant?

• A) An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.
• B) If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.
• C) An increase in the company's degree of operating leverage is likely to encourage a company to use more debt in its capital structure.
• D) An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure.
• E) Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively little debt.

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Definitions:

Times Interest Earned

A financial metric assessing a company's ability to meet its interest obligations from its earnings before interest and taxes.

Interest Expense

The cost incurred by an entity for borrowed funds over a period, represented as a financial charge or fee.

Equity Multiplier

A financial ratio that measures the amount of a company’s assets financed by its shareholders' equity, indicating leverage.