FIN 534 RANK Imagine Your Future /fin534rank.com FIN 534 RANK Imagine Your Future /fin534rank.com | Page 151

a. A firm can use retained earnings without paying a flotation cost.
Therefore, while the cost of retained earnings is not zero, its cost is
generally lower than the after-tax cost of debt.
b. The capital structure that minimizes a firm’s weighted average cost of
capital is also the capital structure that maximizes its stock price.
c. The capital structure that minimizes the firm’s weighted average cost
of capital is also the capital structure that maximizes its earnings per
share.
d. If a firm finds that the cost of debt is less than the cost of equity,
increasing its debt ratio must reduce its WACC.
e. Other things held constant, if corporate tax rates declined, then the
Modigliani-Miller tax-adjusted tradeoff theory would suggest that firms
should increase their use of debt.
3. Which of the following statements is CORRECT?
a. In general, a firm with low operating leverage also has a small
proportion of its total costs in the form of fixed costs.