Which of the following statements is CORRECT? A) The capital structure that maximizes the stock price is also the capital structure that minimizes the cost of equity from retained earnings (r_S). 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) If a company increases its debt ratio,this will typically increase the marginal costs of both debt and equity,but it still may reduce 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.

Question

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Increasing a company's debt ratio typically increases the cost of both debt and equity. However, if the increase in debt results in a lower WACC (weighted average cost of capital), this can still potentially increase the firm's overall value and stock price. Therefore, the capital structure that maximizes the stock price may differ from the one that minimizes the cost of equity. Choice A is incorrect. Choice B is incorrect because maximizing earnings per share does not necessarily correspond to maximizing the stock price. Choice C is incorrect because the TIE ratio is a measure of the company's ability to pay interest on its debt, but it is not necessarily related to the stock price. Choice E is incorrect because higher personal tax rates would discourage companies from increasing their debt ratios, as interest payments on debt are tax deductible for corporations.

Which of the Following Statements Is CORRECT