Which of the following statements is CORRECT?
A) Generally,debt ratios do not vary much among different industries,although they do vary among firms within a given industry.
B) Electric utilities generally have very high common equity ratios because their revenues are more volatile than those of firms in most other industries.
C) Airline companies tend to have very volatile earnings,and as a result they generally have high target debt-to-equity ratios.
D) Wide variations in capital structures exist both between industries and among individual firms within given industries.These differences are caused by differing business risks and also managerial attitudes.
E) Since most stocks sell at or very close to their book values,book value capital structures are typically adequate for use in estimating firms' weighted average costs of capital.

Question

Quizplus · Accepted Answer

Option D is correct as it clearly states that there are variations in capital structures between industries as well as among individual firms within industries. These differences are due to varying business risks and managerial attitudes. Option A is incorrect as debt ratios do vary among different industries depending on their business risks and capital requirements. Option B is incorrect as electric utilities have stable revenues and therefore have low debt ratios. Option C is incorrect as airline companies do not have high target debt-to-equity ratios due to volatile earnings. Option E is incorrect as most stocks trade at a premium or discount to their book value, and book value capital structures may not accurately reflect the true costs of capital.

Which of the Following Statements Is CORRECT