Which of the Following Statements Is CORRECT

question 13

Multiple Choice

Which of the following statements is CORRECT?

• A) The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share.
• B) The capital structure that maximizes the stock price is also the capital structure that maximizes the firm's times interest earned (TIE)ratio.
• C) Increasing a company's debt ratio will typically reduce the marginal costs of both debt and equity financing; however, this still may raise the company's WACC.
• D) If Congress were to pass legislation that increases the personal tax rate but decreases the corporate tax rate, this would encourage companies to increase their debt ratios.
• E) The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC).

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Definitions:

Differential Costs

The difference in total cost that will result from selecting one choice over another.

Sunk Costs

Sunk costs refer to money already spent and permanently lost, which cannot be recovered and should not influence future financial decisions.

Opportunity Costs

A rephrased definition: The potential gains or benefits that are lost when choosing one alternative over another in decision-making.

Gross Margin

The difference between sales revenue and the cost of goods sold, expressed as a percentage of sales revenue.