Question Details

Which of the following factors is likely to encourage a company to increase its debt ratio 



 .	Which of the following statements is likely to encourage a firm to increase its debt ratio in its capital structure?

a.	Its sales become less stable over time.
b.	Its corporate tax rate declines.
c.	Management believes that the firm- stock is overvalued.
d.	Statements a and b are correct.
e.	None of the statements above is correct.

 .	Which of the following factors is likely to encourage a corporation to increase the proportion of debt in its capital structure?

a.	An increase in the corporate tax rate.
b.	An increase in the personal tax rate.
c.	An increase in the company- degree of operating leverage.
d.	The company- assets become less liquid.
e.	An increase in expected bankruptcy costs.
 .	Which of the following would increase the likelihood that a company would increase its debt ratio in its capital structure?

a.	An increase in costs incurred when filing for bankruptcy.
b.	An increase in the corporate tax rate.
c.	An increase in the personal tax rate.
d.	A decrease in the firm- business risk.
e.	Statements b and d are correct.

 .	Which of the following factors is likely to encourage a company to increase its debt ratio ?

a.	An increase in the corporate tax rate.
b.	An increase in the personal tax rate.
c.	Its assets become less liquid.
d.	Both statements a and c are correct.
e.	All of the statements above are correct.

 .	Jones Co. currently is 100 percent equity financed.  The company is considering changing its capital structure.  More specifically, Jones’ CFO is considering a recapitalization plan in which the firm would issue long-term debt with a yield of 9 percent and use the proceeds to repurchase common stock.  The recapitalization would not change the company- total assets nor would it affect the company- basic earning power, which is currently 15 percent.  The CFO estimates that the recapitalization will reduce the company- WACC and increase its stock price.  Which of the following is also likely to occur if the company goes ahead with the planned recapitalization?

a.	The company- net income will increase.
b.	The company- earnings per share will decrease.
c.	The company- cost of equity will increase.
d.	The company- ROA will increase.
e.	The company- ROE will decrease.




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