Which of the following statements is CORRECT?
A) Increasing its use of financial leverage is one way to increase a firm's basic earning power (BEP).
B) If a firm lowered its fixed costs but increased its variable costs by just enough to hold total costs at the present level of sales constant, this would increase its operating leverage.
C) The debt ratio that maximizes expected EPS generally exceeds the debt ratio that maximizes share price.
D) If a company were to issue debt and use the money to repurchase common stock, this would reduce its basic earning power ratio. (Assume that the repurchase has no impact on the company's operating income.)
E) If a change in the bankruptcy code made bankruptcy less costly to corporations, this would tend to reduce corporations' debt ratios.

Question

Quizplus · Accepted Answer

The debt ratio that maximizes expected EPS often exceeds the debt ratio that maximizes share price because higher debt can increase EPS through tax shields, but it also increases financial risk, which can negatively impact share price.

Which of the Following Statements Is CORRECT