Which of the following statements is correct?
A The capital structure that maximizes expected EPS also maximizes the price per share of common stock
B The capital structure that minimizes the interest rate on debt also maximizes the expected EPS
C The capital structure that minimizes the required return on equity also maximizes the stock price
D The capital structure that minimizes the WACC also maximizes the price per share of common stock
E The capital structure that gives the firm the best credit rating also maximizes the stock price
Firm M is a mature firm in a mature industry. Its annual net income and net cash flows are both consistently high and stable. However, M’s growth prospects are quite limited, so its capital budget is small relative to its net income. Firm N is a relatively new firm in a new and growing industry. Its markets and products have not stabilized, so its annual operating income fluctuates considerably. However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is correct?
A Firm M probably has a lower debt ratio than Firm N
B Firm M probably has a higher dividend payout ratio than Firm N
C If the corporate tax rate increases, the debt ratio of both firms is likely to decline
D The two firms are equally likely to pay high dividends E Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income
Which of the following statements is correct?
A One defect of the IRR method vs. the NPV is that the IRR does not take account of cash flows over a project’s full life
B One defect of the IRR method vs. the NPV is that the IRR does not take account of the time value of money
C One defect of the IRR method vs. the NPV is that the IRR does not take account of the cost of capital
D One defect of the IRR method vs. the NPV is that the IRR values a dollar received today the same as a dollar that will not be received until sometime in the future
E One defect of the IRR method vs. the NPV is that the IRR does not take proper account of differences in the sizes of projects