21. Which of the following statements is CORRECT, holding other things constant? a. Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively little debt. b. An increase in the personal tax rate is likely to increase the debt ratio of the average corporation. c. If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely lead to lower debt ratios for corporations. d. An increase in the company's degree of operating leverage would tend to encourage the firm to use more debt in its capital structure so as to keep its total risk unchanged. e. An increase in the corporate tax rate would in theory encourage companies to use more debt in their capital structures.

22. Companies HD and LD have the same total assets, total investor-supplied capital, operating income (EBIT), tax rate, and business risk. Company HD, however, has a much higher debt ratio than LD. Also, both companies' returns on investors capital (ROIC) exceed their after-tax costs of debt, rd(1 T). Which of the following statements is CORRECT? a. HD should have a higher return on assets (ROA) than LD. b. HD should have a higher times interest earned (TIE) ratio than LD. c. HD should have a higher return on equity (ROE) than LD, but its risk, as measured by the standard deviation of ROE, should also be higher than LD's. d. Given that ROIC > rd(1 T), HD's stock price must exceed that of LD. e. Given that ROIC > rd(1 T), LD's stock price must exceed that of HD.

23. Which of the following statements is CORRECT? a. When a company increases its debt ratio, the costs of equity and debt both increase. Therefore, the WACC must also increase. b. The capital structure that maximizes the stock price is generally the capital structure that also maximizes earnings per share. c. All else equal, an increase in the corporate tax rate would tend to encourage companies to increase their debt ratios. d. Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC. e. Since the cost of debt is generally fixed, increasing the debt ratio tends to stabilize net income.

24. Which of the following statements is CORRECT? a. Generally, debt ratios do not vary much among different industries, although they do vary among firms within a given industry. b. Electric utilities generally have very high common equity ratios because their revenues are more volatile than those of firms in most other industries. c. Airline companies tend to have very volatile earnings, and as a result they generally have high target debt-to-equity ratios. d. Wide variations in capital structures exist both between industries and among individual firms within given industries. These differences are caused by differing business risks and also managerial attitudes. e. Since most stocks sell at or very close to their book values, book value capital structures are typically adequate for use in estimating firms' weighted average costs of capital.

25. Assume that you and your brother plan to open a business that will make and sell a newly designed type of sandal. Two robotic machines are available to make the sandals, Machine A and Machine B. The price per pair will be $30.00 regardless of which machine is used. The fixed and variable costs associated with the two machines are shown below. What is the difference between the break-even points for Machines A and B? Do not round your intermediate calculations. (Hint: Find BEB - BEA) Machine A Machine B Price per pair (P) $30.00 $30.00 Fixed costs (F) $25,000 $100,000 Variable cost/unit (V) $7.00 $4.00

a. 3,035 b. 2,235 c. 2,069 d. 2,621 e. 2,759 26. Confu Inc. expects to have the following data during the coming year. What is the firm's expected ROE? Capital $200,000 Interest rate 8% Debt/Capital, book value 65% Tax rate 40% EBIT $25,000

a. 10.51% b. 14.52% c. 14.39% d. 12.51% e. 12.39%

27. If a firm adheres strictly to the residual dividend model, the issuance of new common stock would suggest that a. the dividend payout ratio has remained constant. b. the dividend payout ratio is increasing. c. no dividends will be paid during the year. d. the dividend payout ratio is decreasing. e. the dollar amount of capital investments had decreased.

28. Which of the following statements is CORRECT? a. One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their investment in the company. b. One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account. c. Stock repurchases can be used by a firm that wants to increase its debt ratio. d. Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities. e. One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding. 29. Ring Technology has a capital budget of $875,000, it wants to maintain a target capital structure of 35% debt and 65% equity, and it also wants to pay a dividend of $575,000. If the company follows the residual dividend model, how much net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure in balance? a. $1,395,375 b. $1,075,125 c. $1,212,375 d. $1,143,750 e. $869,250

30. NY Fashions has the following data. If it follows the residual dividend model, how much total dividends, if any, will it pay out?

Capital budget $1,000,000 % Debt 65% Net income (NI) $625,000 a. $231,000 b. $258,500 c. $291,500 d. $335,500 e. $275,000