In the absence of taxes,which one of the following would not be expected to change with changes in the firm's capital structure?
A) Weighted-average cost of capital
B) Expected return on equity
C) Expected return on assets
D) Expected earnings per share

Question

Quizplus · Accepted Answer

In the absence of taxes, the interest paid on debt is not tax-deductible, and hence the cost of debt remains the same irrespective of the capital structure. However, changes in capital structure can affect the cost of equity, which in turn affects the weighted-average cost of capital, the expected return on equity, and the expected earnings per share. Therefore, A, B, and D would be expected to change with changes in the firm's capital structure, while C would remain the same.

In the Absence of Taxes,which One of the Following Would