Exam 16: Capital Structure Decisions

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A) $600,000; 7.5%
B) $600,000; 8.0%
C) $800,000; 7.0%
D) $800,000; 7.5%
E) $800,000; 8.0%

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A) 0.64
B) 0.67
C) 0.71
D) 0.75
E) 0.79

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A) The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.
B) The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price.
C) The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC.
D) The optimal capital structure simultaneously maximizes stock price and minimizes the WACC.
E) As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS.

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A) $3,200
B) $3,600
C) $4,000
D) $4,200
E) $4,800

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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) 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) 1.53%
B) 1.70%
C) 1.87%
D) 2.05%
E) 2.26%

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A) −5.20%
B) −5.78%
C) −6.36%
D) −6.99%
E) −7.69%

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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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