Question

The firm's target capital structure should do which of the following?

a. Maximize the earnings per share (EPS).
b. Minimize the cost of equity (rs).
c. Minimize the cost of debt (rd).
d. Obtain the highest possible bond rating.
e. Minimize the weighted average cost of capital (WACC).

Answer 1

e. Minimize the weighted average cost of capital (WACC)

Step-by-step explanation:

A: Earnings per share is linked to the stockholders' only, therefore, it cannot achieve the target capital structure. It is a wrong statement.

B: Minimizing the cost of equity is related to the equity only, so, it is also a false statement.

C: Cost of debt is only related to liabilities. It cannot minimize the total target capital structure. Therefore, it cannot be an answer.

D: It is out of question because target capital structure cannot obtain the bond rating.

E: Since weighted average cost of capital is the combination of debt and equity capital's cost, it can be minimized with the firm's target capital structure.