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Regarding WACC, stock price, corporate tax, which statement is most correct?

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Which of the following statements is most correct?

a. When a company increases its debt ratio, the costs of equity and debt capital both increase. Therefore, the weighted average cost of capital (WACC) must also increase.
b. The capital structure that maximizes 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 a company to increase its debt ratio.
d. Statements a and b are correct
e. Statements a and c are correct.

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Solution Summary

In a sentence or two each, the concepts are explained with answers.

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a) is wrong. When a company increases its debt ratio, the share of costs of debt capital will increase, but share of equity will decrease. Therefore, the weighted ...

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