Question

Which of the following statements is CORRECT?

a. If Congress lowered corporate tax rates while other things were held constant, and if the Modigliani-Miller tax-adjusted theory of capital structure were correct, this would tend to cause corporations to decrease their use of debt.
b. A change in the personal tax rate should not affect firms' capital structure decisions.
c. "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.
d.The optimal capital structure is the one that simultaneously (i) maximizes the price of the firm's stock, (ii) minimizes its WACC, and (iii) maximizes its EPS.
e. If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.

Answer 1

D)The optimal capital structure is the one that simultaneously (i) maximizes the price of the firm's stock, (ii) minimizes its WACC, and (iii) maximizes its EPS.

Step-by-step explanation:

When the weighted average cost of capital (WACC) decreases, the company's profit increases.

So a capital structure that minimizes the WACC will maximize its profits, leading to a maximization of the earnings per share (EPS) and the price of the company's stock. The more the company makes, the higher the price of its stock and the higher its EPS.