Question Details

Which of the following will occur as a result of the recapitalization 



 .	Which of the following statements is most correct?

a.	When a company increases its debt ratio, the costs of both equity and debt capital 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.	Since debt financing is cheaper than equity financing, increasing a company- debt ratio will always reduce the company- WACC.
d.	The capital structure that maximizes stock price is generally the capital structure that also maximizes the company- WACC.
e.	None of the statements above is correct.

 .	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.
 .	Which of the following statements is most correct?

a.	Since debt financing raises the firm- financial risk, increasing a company- debt ratio will always increase the company- WACC.
b.	Since debt financing is cheaper than equity financing, increasing a company- debt ratio will always reduce the company- WACC.
c.	Increasing a company- debt ratio will typically reduce the marginal costs of both debt and equity financing; however, it still may raise the company- WACC.
d.	Statements a and c are correct.
e.	None of the statements above is correct.

 .	Ridgefield Enterprises has total assets of $300 million.  The company currently has no debt in its capital structure.  The company- basic earning power is 15 percent.  The company is contemplating a recapitalization where it will issue debt at 10 percent and use the proceeds to buy back shares of the company- common stock.  If the company proceeds with the recapitali-zation its operating income, total assets, and tax rate will remain the same.  Which of the following will occur as a result of the recapitalization ?

a.	The company- ROA will decline.
b.	The company- ROE will increase.
c.	The company- basic earning power will decline.
d.	Statements a and b are correct.
e.	All of the statements above are correct.

 .	Which of the following statements is most correct?

a.	The capital structure that maximizes stock price is also the capital structure that minimizes the weighted average cost of capital (WACC).
b.	The capital structure that maximizes stock price is also the capital structure that maximizes earnings per share.
c.	The capital structure that maximizes stock price is also the capital structure that maximizes the firm- times interest earned (TIE) ratio.
d.	Statements a and b are correct.
e.	Statements b and c are correct.



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