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b. There is no reason to think that changes in the personal tax rate would
affect firms’ capital structure decisions.
c. A firm with high business risk is more likely to increase its use of
financial leverage than a firm with low business risk, assuming all else
equal.
d. If a firm's after-tax cost of equity exceeds its after-tax cost of debt, it
can always reduce its WACC by increasing its use of debt.
e. Suppose a firm has less than its optimal amount of debt. Increasing its
use of debt to the point where it is at its optimal capital structure will
decrease the costs of both debt and equity financing.
4. Companies HD and LD have identical amounts of assets, operating
income (EBIT), tax rates, and business risk. Company HD, however, has
a much higher debt ratio than LD. Company HD’s basic earning power
ratio (BEP) exceeds its cost of debt (rd). Which of the following
statements is CORRECT?
a. Company HD has a higher return on assets (ROA) than Company LD.
b. Company HD has a higher times interest earned (TIE) ratio than
Company LD.