05 EOC5 - Question 1 (1 point) Financial risk refers to the...

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Question 1 (1 point) Financial risk refers to the extra risk stockholders bear as a result of the use of debt as compared with the risk they would bear if no debt were used. a. True b. False Question 2 (1 point) Which of the following statements is most correct? a. A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, the cost of retained earnings is generally lower than the after-tax cost of debt financing. b. The capital structure that minimizes the firm's cost of capital is also the capital structure that maximizes the firm's stock price. c. The capital structure that minimizes the firm's cost of capital is also the capital structure that maximizes the firm's earnings per share. d. If a firm finds that the cost of debt financing is currently less than the cost of equity financing, an increase in its debt ratio will always reduce its cost of capital. e. Statements a and b are correct. Question 3 (1 point) Ridgefield Enterprises has total assets of $300 million. The company currently has no debt in its capital structure. The company's basic earning power is 15 percent. The company is contemplating a recapitalization where it will issue debt at 10 percent and use the proceeds to buy back shares of the company's common stock. If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will
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This note was uploaded on 05/12/2010 for the course BUSINESS BS525 taught by Professor Matthews during the Winter '10 term at Drexel.

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05 EOC5 - Question 1 (1 point) Financial risk refers to the...

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