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    Probability - Firm M is a mature firm in a mature industry

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    Need to know which answer is correct and why, and why the other answers are not correct. Please show work so I will understand the approach.

    Firm M is a mature firm in a mature industry; its annual net income and net cash flow are both consistently high and very stable. The firm's growth prospects are quite limited; therefore, the firm's capital budget is small relative to its net income. Firm N is a relatively new firm in a new industry; its annual operating income fluctuates considerably, but the firm has substantial growth opportunities. Its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is most correct?
    a. Firm M probably has a lower debt ratio than Firm N.
    b. Firm M probably has a higher dividend payout ratio than Firm N.
    c. If the corporate tax rate increases, the debt ratio of both firms is likely to fall.
    d. Statements a and b are correct.
    e. Statements b and c are correct.

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    Solution Preview

    In this case: e) Statements b and c are correct .
    <br>Reasons: Statement c is the most likely one since since when corporate tax rate increases , it has effect on the savings due to interest ...


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