Which of the following statements is correct?
A) "Business risk" is differentiated from "financial risk" by the fact that financial risk reflects only the use of debt,while business risk reflects both the use of debt and such factors as sales variability,cost variability,and operating leverage.
B) If corporate tax rates were decreased while other things were held constant,and if the Modigliani-Miller tradeoff theory of capital structure were correct,then corporations should tend to increase their use of debt.
C) If corporate tax rates were decreased while other things were held constant,and if the Modigliani-Miller tradeoff theory of capital structure were correct,then corporations should tend to decrease their use of debt.
D) The optimal capital structure is the one which (1)maximizes the price of the firm's stock, (2)minimizes its WACC,and (3)maximizes its EPS.
E) Statements b and d are both correct.

Question

Quizplus · Accepted Answer

If corporate tax rates decrease, the tax shield benefit of debt decreases, leading firms to potentially reduce their use of debt according to the Modigliani-Miller tradeoff theory.

Which of the Following Statements Is Correct