Which of the Following Statements Is Correct

question 61

Multiple Choice

Which of the following statements is correct?

• A)If corporate tax rates were decreased while other things were held constant, and if the Modigliani-Miller tax-adjusted trade-off theory of capital structure were correct, this would tend to cause corporations to decrease their use of debt.
• B)A change in the personal tax rate should not affect firms' capital structure decisions.
• C)"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 factors such as sales variability, cost variability, and operating leverage.
• D)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.

---

Definitions:

Breakeven Point

The level of production or number of sales at which costs equal revenues, resulting in neither profit nor loss.

Fixed Costs

Expenses that do not change with the level of production or sales, such as rent, salaries, and insurance.

Luxury Goods

Products or services that are not essential but are considered desirable and are associated with high quality and high price.

Price Inelastic

Describes a situation where the demand for a product does not significantly change with a change in the product's price.