土豆妮

Which of the following firms is most likely to utilize additional debt the next time it raises capital? The firm:

A) that has many new fixed assets.

B) firm that has experienced significant losses in recent years.

C) in a high tax bracket.

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The value of tax deductibility rises with tax rates. Of course, there are other ways to reduce taxes. Firms with many new assets are probably also benefiting from high levels of depreciation. Firms with recent losses may be avoiding taxes by writing off those losses.

土豆妮

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

A) The optimal capital structure is the one that minimizes the weighted average cost of capital and consequently maximizes the value of the firm's share price.

B) If bankruptcy costs were included into the M&M analysis of capital structure in a tax world there would be an optimal capital structure between no debt and all debt.

C) The firm's share price is maximized when the firm maximizes its earnings per share while it minimizes its cost of capital.

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The optimal capital structure is the one that maximizes stock price and minimizes the WACC. The optimal capital structure is not the one that maximizes the firm’s EPS.

土豆妮

Which of the following statements about capital structure theories is most accurate?

A) Based on signaling theory, if a firm issues new common stock it means that the firm thinks future investment prospects are better than normal.

B) In a world with taxes and bankruptcy costs one would expect there to be an optimal capital structure where the cost of capital is minimized and share price is maximized.

C) In a Modigliani and Miller (MM) world with taxes, but no bankruptcy cost, you would expect to see firms taking on very little debt.

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The other statements are false. In a tax world without bankruptcy the optimal capital structure is 100% debt. When firms issue new equity investment projects look poor.