Reference no: EM132063981

Which of the following statements is true concerning the comparative leverage approach to determining an optimal capital structure?

I. This approach is rarely used for analyzing the debt ratio of the firm and is regarded by most financial managers as too simple to be of any value.

II. Comparing a firm to an industry average assumes that firms within the same industry are comparable and, on average, operating at or close to their optimal debt ratio.

III. Using regression analysis to consider the differences between a firm and its industry may provide a more complete analysis of comparative leverage.

A. I only

B. II only

C. III only

D. I and III only

E. II and III only

F. I, II, and III

When choosing the financing instruments appropriate to a new capital structure, the firm should:

I. Match the cash flows of the financing instrument with the expected cash flows of the asset stream (unless overriding reasons exist not to do so)

II. Avoid financing instruments that benefit one stakeholder group at the expense of the others

III. Consider the particular circumstances under which the firm is doing business (e.g., market competition, restrictive loan covenants, and foreign investments)

A. I only

B. I and II only

C. I and III only

D. II and III only

E. I, II, and III