Answered: Which of the following statements is…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 3Q

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Which of the following statements is CORRECT?

Select one:

a. The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC).

b. The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share.

c. The capital structure that maximizes the stock price is also the capital structure that maximizes the firm’s times interest earned (TIE) ratio.

d. 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.

e. 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.

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