Final answer:
The correct statements include that a capital structure minimizing WACC maximizes stock price, more debt can reduce WACC if the cost of debt is less than equity to an extent, and retained earnings are generally a lower-cost source of funding than after-tax debt.
Step-by-step explanation:
Regarding a firm's capital structure, the statement that the capital structure which minimizes a firm's weighted average cost of capital (WACC) is also the one that maximizes its stock price is correct. This is because a lower WACC indicates a higher valuation of the firm's future cash flows, thereby increasing the stock price. Next, if a firm finds that the cost of debt is less than the cost of equity, using more debt can indeed reduce its WACC, up to a certain point where the benefits of debt are outweighed by the financial risk of default.
However, other factors also influence the optimal debt level, such as the firm's ability to service debt and potential impacts on the firm's operating performance. Additionally, with regard to changes in corporate tax rates, according to the Modigliani-Miller tax-adjusted tradeoff theory, if corporate tax rates declined, this might result in firms reducing their use of debt because the tax shield benefit of debt would be less valuable.
Lastly, it is generally true that a firm can use retained earnings without incurring flotation costs, thus making retained earnings a cheaper source of funding compared to new equity or debt, though not cost-free. Nevertheless, the cost of retained earnings is often seen as lower than the after-tax cost of debt since the latter can be adjusted for the tax shield it provides.