Question Details

Capital Structure and Leverage


6. Which of the following statements is most correct?
a. Increasing financial leverage is one way to increase a firm- revenues.
b. Firms with lower fixed costs tend to have greater operating leverage.
c. The debt ratio that maximizes EPS generally exceeds the debt ratio that maximizes share price.
d. Statements a and b are correct.

7. As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS.
a. True
b. False


8. The optimal capital structure simultaneously maximizes stock price and minimizes the WACC.
a. True
b. False


9. The firm- beta coefficient if it has no debt is called its:
a. unlevered beta.
b. levered beta.
c. risk-free beta
d. stand-alone beta

10. From the information below, select the optimal capital structure for Minnow Entertainment Company.
a. Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.
b. Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.
c. Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
d. Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.
e. Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.



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