Which of the Following Statements Is CORRECT

question 39

Multiple Choice

Which of the following statements is CORRECT?

• A) the capital structure that minimizes a firm's weighted average cost of capital is also the capital structure that maximizes its stock price.
• B) the capital structure that minimizes the firm's weighted average cost of capital is also the capital structure that maximizes its earnings per share.
• C) if a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its wacc.
• D) other things held constant, if corporate tax rates declined, then the modigliani-miller tax-adjusted tradeoff theory would suggest that firms should increase their use of debt.
• E) a firm can use retained earnings without paying a flotation cost. therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt.

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Definitions:

Par

The face value of a bond or security, often used in the context of bonds trading at, above, or below their issued price.

Market Rate

The prevailing interest rate available in the marketplace for similar financial instruments or loans.

Financial Instrument

A contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Maturity Value

The amount that will be payable to the holder of a financial instrument at its maturity date, including principal and interest.