Which of the following statements is correct?

a. increasing its use of financial leverage is one way to increase a firm's return on investors' capital (roic).
b. if a firm lowered its fixed costs but increased its variable costs by just enough to hold total costs at the present level of sales constant, this would increase its operating leverage.
c. the debt ratio that maximizes expected eps generally exceeds the debt ratio that maximizes share price.
d. if a company were to issue debt and use the money to repurchase common stock, this would reduce its return on investors' capital (roic). (assume that the repurchase has no impact on the company's operating income.)
e. if a change in the bankruptcy code made bankruptcy less costly to corporations, this would tend to reduce corporations' debt ratios.

Option C , statement is correct.

The debt ratio that maximises expected EPS generally exceeds the debt ratio that maximises share price.

Explanation:

Debt is an effective tool for a corporation for raising funds without diluting the power of equity for growth and development. An exposure to capital equity to finance capex may lead to a reduction in earning per share. Debt, on the other hand, helps a firm benefit from the financial leverage that can also enhance shareholder return.

Financial leverage means leveraging lent funding to make investments with the hope that the gains will outweigh the borrowing costs by way of additional income. The levers are advantageous if the ROI is higher than the debt cost. When ROI is below the interest level, the leverage is disadvantageous. The results are favorable because ROI is equal to the debt cost.

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