Which of the following statements regarding a firm's optimal capital structure is true? the optimal capital structure maximizes the firm's cost of debt. the optimal capital structure maximizes the firm's earnings per share (eps). the optimal capital structure maximizes the firm's cost of equity. the optimal capital structure maximizes the firm's stock price. understanding the impact of debt in the capital structure suppose you are conducting a workshop on capital structure decisions and you want to highlight certain key issues related to capital structure. your assistant has made a list of points for your session, but he thinks he might have made some mistakes. review the list and identify which items are correct. check all that apply. workshop talking points an increase in the risk of bankruptcy is likely to reduce the firm's free cash flows in the future. an increase in debt financing beyond a certain point is likely to increase the cost of equity. the pretax cost of debt increases as the firm's risk of bankruptcy increases. risks of bankruptcy increase management spending on perquisites and increase agency costs. an increase in debt financing decreases the risk of bankruptcy.

The gilbert instrument corporation is considering replacing the wood steamer it currently uses to shape guitar sides. the steamer has 6 years of remaining life. if kept,the steamer will have depreciaiton expenses of $650 for five years and $325 for the sixthyear. its current book value is $3,575, and it can be sold on an internet auction site for$4,150 at this time. if the old steamer is not replaced, it can be sold for $800 at the endof its useful life. gilbert is considering purchasing the side steamer 3000, a higher-end steamer, whichcosts $12,000 and has an estimated useful life of 6 years with an estimated salvage value of$1,500. this steamer falls into the macrs 5-year class, so the applicable depreciationrates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. the new steamer is fasterand allows for an output expansion, so sales would rise by $2,000 per year; the newmachine's much greater efficiency would reduce operating expenses by $1,900 per year.to support the greater sales, the new machine would require that inventories increase by$2,900, but accounts payable would simultaneously increase by $700. gilbert's marginalfederal-plus-state tax rate is 40%, and its wacc is 15%.a. should it replace the old steamer? b. npv of replace = $2,083.51