Which of the following statements is CORRECT?
A) the capital structure that maximizes the stock price is generally the capital structure that also maximizes earnings per share.
B) all else equal, an increase in the corporate tax rate would tend to encourage a company to increase its debt ratio.
C) since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its wacc.
D) since debt is cheaper than equity, increasing a company's debt ratio will always reduce its wacc.
E) when a company increases its debt ratio, the costs of equity and debt both increase. therefore, the wacc must also increase.

Question

Quizplus · Accepted Answer

An increase in the corporate tax rate would make interest payments tax-deductible and provide a tax shield, which would encourage a company to increase its debt ratio. This would decrease the company's tax liability and increase its after-tax cash flows.

Which of the Following Statements Is CORRECT