Which of the following statements is CORRECT?
A) Increasing its use of financial leverage is one way to increase a firm's return on investors' capital (ROIC).
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 return on investors' capital (ROIC).(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

C) The debt ratio that maximizes expected EPS generally exceeds the debt ratio that maximizes share price because adding debt increases financial risk, which can increase expected EPS up to a point but beyond that point can decrease share price as the cost of debt increases and the risk to equity holders becomes too great.

Which of the Following Statements Is CORRECT