Levered firm optimal capital structure

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Reference no: EM132022293

1. Which one of the following is a correct statement?

a. The cost of preferred stock decreases when the tax rate increases.

b. Current U.S.tax laws favor companies using debt financing.

c. A decrease in a firm's debt-equity ratio will usually decrease the firm's cost of capital.

d. A decrease in the dividend growth rate increases the cost of equity.

2. A taxpaying, levered firm's optimal capital structure:

a. is 100 percent equity financing.

b. consists of equal amounts of debt and equity financing.

c. is 100 percent debt financing.

d. is the mixture of debt and equity financing that minimizes the firm's aftertax cost of debt.

e. is the mixture of debt and equity financing that minimizes the weighted average cost of capital.

Reference no: EM132022293

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