1. From the information below, select the optimal capital structure for Minnow Entertainment Company.
a. Debt = 40%; Equity = 60%; EPS = Rs.2.95; Stock price = Rs.26.50.
b. Debt = 50%; Equity = 50%; EPS = Rs.3.05; Stock price = Rs.28.90.
c. Debt = 60%; Equity = 40%; EPS = Rs.3.18; Stock price = Rs.31.20.
d. Debt = 80%; Equity = 20%; EPS = Rs.3.42; Stock price = Rs.30.40.
e. Debt = 70%; Equity = 30%; EPS = Rs.3.31; Stock price = Rs.30.00.
2. Which of the following statements is most correct?
a. The capital structure that maximizes stock price is also the capital structure that minimizes the weighted average cost of capital (WACC).
b. The capital structure that maximizes stock price is also the capital structure that maximizes earnings per share.
c. The capital structure that maximizes stock price is also the capital structure that maximizes the firm’s times interest earned (TIE) ratio.
d. Statements a and b are correct.
e. Statements b and c are correct.
3. If a firm adheres strictly to the residual dividend policy, a sale of new common stock by the company would suggest that
a. The dividend payout ratio has remained constant.
b. The dividend payout ratio is increasing.
c. No dividends were paid for the year.
d. The dividend payout ratio is decreasing.
e. The dollar amount of investments has decreased.
4. Which of the following statements is most correct?
a. The optimal capital structure minimizes the WACC.
b. If the after-tax cost of equity financing exceeds the after-tax cost of debt financing, firms are always able to reduce their WACC by increasing the amount of debt in their capital structure.
c. Increasing the amount of debt in a firm’s capital structure is likely to increase the costs of both debt and equity financing.
d. Statements a and c are correct.
e. Statements b and c are correct.