When a firm alters its capital structure to include more or less debt (and, in turn, less or more equity), it impacts which of the following?
A)The residual cash flows available for stock holders
B)The number of shares of stock outstanding
C)The earnings per share (EPS)
D)All of the choices

Question

Quizplus · Accepted Answer

When a firm alters its capital structure to include more or less debt, it impacts all of the given options. With more debt, there will be less residual cash flows available for stockholders, as the interest payments on debt must be paid first. The number of shares of stock outstanding may change as the company may issue new stocks to pay off debt or might repurchase outstanding stocks. Also, the earnings per share (EPS) will be impacted due to the interest payments on debt, which are tax-deductible and will lower the net income, affecting the EPS.

When a Firm Alters Its Capital Structure to Include More