Which of the following statements is CORRECT? A change in the personal tax rate

Question

Which of the following statements is CORRECT? A change in the personal tax rate should not affect firms' capital structure decisions "Business risk" is differentiated from "financial risk" by the fact that financial risk reflects only the use of debt, while business risk reflects both the use of debt and such factors as sales variability, cost variability, and operating leverage The optimal capital structure is the one that simultaneously (1) maximizes the price of the firm's stock, (2) minimizes its WACC, and (3) maximizes its EPS If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation If corporate tax rates were decreased while other things were held constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital structure were correct, this would tend to cause corporations to decrease their use of debt

Explanation / Answer

Statement 3 is correct

Optimal capital steuctust is one that minimises wacc, increases stock price and maximises EPS.

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