6.Which of the following statements about a firm's capital structure is least accurate?

A)   The degree of total leverage equals the degree of operating leverage times the degree of financial leverage.

B)   The firm's optimal capital structure occurs where the firm's earnings per share is maximized.

C)   Other things held constant, if you increase a firm's financial leverage you will increase the firm's beta coefficient.

D)   Asymmetric information involves a situation where the firm's managers have better information about the firm's prospects than the investors do.

7.A firm's optimal debt ratio:

A)   minimizes risk.

B)   maximizes return.

C)   is the firm's target capital structure.

D)   is a value equal to 1.0.

8．A firm’s capital structure affects:

A)   default risk but not return on equity.

B)   return on equity but not default risk.

C)   return on equity and default risk.

D)   neither return on equity not default risk.

9．The firm's target capital structure is consistent with which of the following?

A)   Minimum weighted average cost of capital (WACC).

B)   Minimum risk.

C)   Minimum cost of equity (k_s).

D)   Maximum earnings per share (EPS).

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

A)   The personal tax rate increases.

B)   The firm's assets become less liquid.

C)   The firm's earnings become more volatile.

D)   The corporate tax rate increases.

6.Which of the following statements about a firm's capital structure is least accurate?

A)   The degree of total leverage equals the degree of operating leverage times the degree of financial leverage.

B)   The firm's optimal capital structure occurs where the firm's earnings per share is maximized.

C)   Other things held constant, if you increase a firm's financial leverage you will increase the firm's beta coefficient.

D)   Asymmetric information involves a situation where the firm's managers have better information about the firm's prospects than the investors do.

The correct answer was B)

The firm's optimal capital structure occurs where the firm's stock price or value is maximized and the WACC is minimized.

7.A firm's optimal debt ratio:

A)   minimizes risk.

B)   maximizes return.

C)   is the firm's target capital structure.

D)   is a value equal to 1.0.

The correct answer was C)

The optimal debt ratio for a firm balances the influences of risk and return, leading to a maximization of share price. As such, the optimal debt ratio serves as a target level of debt financing for the value-maximizing firm. A debt ratio of 1.0 would be possible only if one hundred percent of the firm were financed with debt, eliminating equity ownership. Such a scenario is impossible.

8．A firm’s capital structure affects:

A)   default risk but not return on equity.

B)   return on equity but not default risk.

C)   return on equity and default risk.

D)   neither return on equity not default risk.

The correct answer was C)

A firm’s capital structure affects both its return on equity and its risk of default.

9．The firm's target capital structure is consistent with which of the following?

A)   Minimum weighted average cost of capital (WACC).

B)   Minimum risk.

C)   Minimum cost of equity (k_s).

D)   Maximum earnings per share (EPS).

The correct answer was A)

At the optimal capital structure the firm will minimize the WACC, maximize the share price of the stock and maximize the value of the firm.

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

A)   The personal tax rate increases.

B)   The firm's assets become less liquid.

C)   The firm's earnings become more volatile.

D)   The corporate tax rate increases.

The correct answer was D)

An increase in the corporate tax rate will increase the tax benefit to the corporation, because interest expense is not taxable. An increase in the personal tax rate will not impact the firm’s cost of capital. More volatile earnings and less liquidity increase the risk of the firm and therefore the firm would not desire to increase financial risk as a result of these changes.