A) the capital structure that minimizes a firm's weighted average cost of capital is also the capital structure that maximizes its stock price.
B) the capital structure that minimizes the firm's weighted average cost of capital is also the capital structure that maximizes its earnings per share.
C) if a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its wacc.
D) other things held constant, if corporate tax rates declined, then the modigliani-miller tax-adjusted tradeoff theory would suggest that firms should increase their use of debt.
E) a firm can use retained earnings without paying a flotation cost. therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt.
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A) there is no reason to think that changes in the personal tax rate would affect firms' capital structure decisions.
B) a firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else equal.
C) if a firm's after-tax cost of equity exceeds its after-tax cost of debt, it can always reduce its wacc by increasing its use of debt.
D) suppose a firm has less than its optimal amount of debt. increasing its use of debt to the point where it is at its optimal capital structure will decrease the costs of both debt and equity financing.
E) in general, a firm with low operating leverage also has a small proportion of its total costs in the form of fixed costs.
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A) an increase in the corporate tax rate.
B) an increase in the personal tax rate.
C) the federal reserve tightens interest rates in an effort to fight inflation.
D) the company's stock price hits a new low.
E) an increase in costs incurred when filing for bankruptcy.
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A) $228.77
B) $254.19
C) $282.43
D) $313.81
E) $345.19
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A) the percentage change in net operating income will be equal to a given percentage change in net income.
B) the percentage change in net income relative to the percentage change in net operating income will depend on the interest rate charged on debt.
C) the percentage change in net income will be greater than the percentage change in net operating income.
D) the percentage change in sales will be greater than the percentage change in ebit, which in turn will be greater than the percentage change in net income.
E) the percentage change in net operating income will be greater than a given percentage change in net income.
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A) since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its wacc.
B) increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing. however, this action still may raise the company's wacc.
C) increasing a company's debt ratio will typically increase the marginal cost of both debt and equity financing. however, this action still may lower the company's wacc.
D) since a firm's beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity.
E) since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its wacc.
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A) electric utilities generally have very high common equity ratios because their revenues are more volatile than those of firms in most other industries.
B) drug companies (prescription, not illegal!) generally have high debt-to-equity ratios because their earnings are very stable and, thus, they can cover the high interest costs associated with high debt levels.
C) wide variations in capital structures exist both between industries and among individual firms within given industries. these differences are caused by differing business risks and also managerial attitudes.
D) since most stocks sell at or very close to their book values, book value capital structures are almost always adequate for use in estimating firms' costs of capital.
E) generally, debt-to-total-assets ratios do not vary much among different industries, although they do vary among firms within a given industry.
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A) $484,359
B) $487,805
C) $521,173
D) $560,748
E) $584,653
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A) $475,875
B) $528,750
C) $587,500
D) $646,250
E) $710,875
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A) company hd has a higher times interest earned (tie) ratio than company ld.
B) company hd has a higher return on equity (roe) than company ld, and its risk, as measured by the standard deviation of roe, is also higher than ld's.
C) the two companies have the same roe.
D) company hd's roe would be higher if it had no debt.
E) company hd has a higher return on assets (roa) than company ld.
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A) $40
B) $48
C) $52
D) $54
E) $60
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A) $65.77
B) $69.23
C) $72.69
D) $76.33
E) $80.14
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A) 0.64
B) 0.67
C) 0.71
D) 0.75
E) 0.79
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A) under mm with zero taxes, financial leverage has no effect on a firm's value.
B) under mm with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt.
C) under mm with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing.
D) under mm with corporate taxes, the effect of business risk is automatically incorporated because rsl is a function of rsu.
E) the major contribution of miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt.
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A) the capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share.
B) the capital structure that maximizes the stock price is also the capital structure that maximizes the firm's times interest earned (tie) ratio.
C) 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.
D) 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.
E) the capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (wacc) .
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A) company hd has a lower roa than company ld.
B) company hd has a lower roe than company ld.
C) the two companies have the same roa.
D) the two companies have the same roe.
E) company hd has a higher net income than company ld.
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