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Which of the following statements about capital structure theory is most correct 



 .	Which of the following statements about capital structure theory is most correct ?

a.	Signaling theory suggests firms should in normal times maintain reserve borrowing capacity that can be used if an especially good investment opportunity comes along.
b.	In general, an increase in the corporate tax rate would cause firms to use less debt in their capital structures.
c.	According to the “trade-off theory,” an increase in the costs of bankruptcy would lead firms to reduce the amount of debt in their capital structures.
d.	Statements a and c are correct.
e.	All of the statements above are correct.

 .	Which of the following statements is most correct?

a.	If Congress were to pass legislation that increases the personal tax rate, but decreases the corporate tax rate, this would encourage companies to increase their debt ratios.
b.	If a company were to issue debt and use the money to repurchase common stock, this action would have no impact on the company- return on assets.  (Assume that the repurchase has no impact on the company- operating income.)
c.	If a company were to issue debt and use the money to increase assets, this action would increase the company- return on equity. (Assume that the company- return on assets remains unchanged.)
d.	Statements a and b are correct.
e.	Statements b and c are correct.

 .	Volga Publishing is considering a proposed increase in its debt ratio, which will also increase the company- interest expense.  The plan would involve the company issuing new bonds and using the proceeds to buy back shares of its common stock.  The company- CFO expects that the plan will not change the company- total assets or operating income.  How-ever, the company- CFO does estimate that it will increase the company- earnings per share (EPS).  Assuming the CFO- estimates are correct, which of the following statements is most correct?

a.	Since the proposed plan increases Volga- financial risk, the company- stock price still might fall even though its EPS is expected to increase.
b.	If the plan reduces the company- WACC, the company- stock price is also likely to decline.
c.	Since the plan is expected to increase EPS, this implies that net income is also expected to increase.
d.	Statements a and b are correct.
e.	Statements a and c are correct.

 .	Which of the following statements is most correct?

a.	Increasing financial leverage is one way to increase a firm- basic earning power (BEP).
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.
e.	Statements a and c are correct.

 .	Company A and Company B have the same tax rate, the same total assets, and the same basic earning power.  Both companies have a basic earning power that exceeds their before-tax costs of debt, kd.  However, Company A has a higher debt ratio and higher interest expense than Company B. Which of the following statements is most correct?

a.	Company A has a lower net income than B.
b.	Company A has a lower ROA than B.
c.	Company A has a lower ROE than B.
d.	Statements a and b are correct.
e.	None of the statements above is correct.



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