Which of the Following Statements Is CORRECT

question 7

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:

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A demographic group born during the post-World War II baby boom, between the years 1946 and 1964.

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The demographic cohort following the baby boomers and preceding the Millennials, typically defined as individuals born from the early-to-mid-1960s to the late 1970s.

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People or principles favoring traditional values and practices, especially in cultural or religious affairs.