Which of the Following Statements Is CORRECT

question 73

Multiple Choice

Which of the following statements is CORRECT?

• A) A change in the personal tax rate should not affect firms' capital structure decisions.
• B) "Business risk" is differentiated from "financial risk" by the fact that financial risk reflects only the use of debt, while business risk reflects both the use of debt and such factors as sales variability, cost variability, and operating leverage.
• C) The optimal capital structure is the one that simultaneously (1) maximizes the price of the firm's stock, (2) minimizes its WACC, and (3) maximizes its EPS.
• D) If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.
• E) If corporate tax rates were decreased while other things were held constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital structure were correct, this would tend to cause corporations to decrease their use of debt.

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Definitions:

Berlin Wall

A fortified barrier that divided East and West Berlin from 1961 to 1989, symbolizing the Cold War division between the communist and non-communist blocs.

Cold War

The period of geopolitical tension between the Soviet Union and the United States and their respective allies from the end of World War II until the dissolution of the Soviet Union in 1991.

Temporary

means lasting for only a limited period of time; not permanent.