Which of the Following Statements Is Correct

question 25

Multiple Choice

Which of the following statements is correct?

• A) "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.
• B) If corporate tax rates were decreased while other things were held constant,and if the Modigliani-Miller tradeoff theory of capital structure were correct,then corporations should tend to increase their use of debt.
• C) If corporate tax rates were decreased while other things were held constant,and if the Modigliani-Miller tradeoff theory of capital structure were correct,then corporations should tend to decrease their use of debt.
• D) The optimal capital structure is the one which (1)maximizes the price of the firm's stock, (2)minimizes its WACC,and (3)maximizes its EPS.
• E) Statements b and d are both correct.

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Definitions:

Net Price

The actual price paid for a product or service after subtracting any discounts, rebates, or allowances.

Discount

A reduction applied to a regular price or rate, often used as an incentive for purchasing goods or services.

Mark-up

The amount added to the cost price of goods to cover overhead and profit; the difference between the cost and selling price.

Retail Prices

The price at which goods and services are sold to the end consumer, inclusive of markup and VAT.