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:

Inventory

Assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in rendering services.

Journal Entry

A record in accounting that notes the debit and credit transactions affecting the financial statements of a business.

Significant Influence

A concept in accounting and finance where an investor has the power to participate in, but not control, the financial and operating policy decisions of an investee.

Investment Account

A financial account that holds securities, shares, or other investments made by an individual or entity with the objective of earning returns.