Which of the following statements is CORRECT?
A) When a company increases its debt ratio,the costs of equity and debt both increase.Therefore,the WACC must also increase.
B) The capital structure that maximizes the stock price is generally the capital structure that also maximizes earnings per share.
C) All else equal,an increase in the corporate tax rate would tend to encourage companies to increase their debt ratios.
D) Since debt financing raises the firm's financial risk,increasing a company's debt ratio will always increase its WACC.
E) Since the cost of debt is generally fixed,increasing the debt ratio tends to stabilize net income.

Question

Quizplus · Accepted Answer

An increase in the corporate tax rate makes debt financing more attractive because interest payments on debt are tax-deductible. This reduces the effective cost of debt, encouraging companies to increase their debt ratios to take advantage of the tax shield provided by debt financing.

Which of the Following Statements Is CORRECT