Which of the Following Statements Is CORRECT

question 2

Multiple Choice

Which of the following statements is CORRECT?

• A) The capital structure that maximizes the stock price is generally the capital structure that also maximizes earnings per share.
• B) All else equal, an increase in the corporate tax rate would tend to encourage a company to increase its debt ratio.
• C) Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC.
• D) Since debt is cheaper than equity, increasing a company's debt ratio will always reduce its WACC.
• E) When a company increases its debt ratio, the costs of equity and debt both increase.Therefore, the WACC must also increase.

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Definitions:

Capital Budgeting Projects

Capital budgeting projects are long-term investment decisions made by companies to invest in assets and projects for future growth and profitability.

Corporate WACC

Weighted Average Cost of Capital for a corporation, which is the average rate of return it must earn on its investments to maintain the value of its stock and pay its debt.

Expected Returns

The projected average return of an investment over a specified period, accounting for various possible outcomes.

After-Tax Cost of Debt

The net cost of debt to a company after accounting for the tax benefits of interest expenses.