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:

Dividend Payments

Payments made by a corporation to its shareholder members, usually derived from the company's profits.

Discount Rate

A rate used to convert future cash flows into their present value, reflecting the opportunity cost of capital or the interest rate.

Perpetuity

An annuity that pays a constant amount to an investor at regular periods forever.

Discount Rate

The rate of interest applied in the evaluation of discounted cash flows to calculate the current value of future cash movements.