Which of the following statements is CORRECT?
A) The capital structure that maximizes the stock price is also the capital structure that minimizes the cost of equity from retained earnings (rs).
B) The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share.
C) The capital structure that maximizes the stock price is also the capital structure that maximizes the firm's times interest earned (TIE) ratio.
D) If a company increases its debt ratio, this will typically increase the marginal costs of both debt and equity, but it still may reduce the company's WACC.
E) If Congress were to pass legislation that increases the personal tax rate but decreases the corporate tax rate, this would encourage companies to increase their debt ratios.

Question

Quizplus · Accepted Answer

Increasing the debt ratio can increase the marginal costs of debt and equity due to higher financial risk, but it may still reduce the WACC if the cost of debt is sufficiently lower than the cost of equity, and the tax shield from debt is significant.

Which of the Following Statements Is CORRECT