Final answer:
An optimal capital structure is designed to maximize earnings per share and the value of the firm, as well as to minimize the cost of capital. The recognized correct selections are A. Maximize the earnings per share, B. Maximize the value of the firm, and D. Minimize the cost of capital. In the final answer, the mentioned correct options that apply are A, B, and D.
Step-by-step explanation:
An optimal capital structure is one that strikes a balance between risk and return, thereby maximizing the value of the firm and minimizing the cost of capital. In pursuing an optimal capital structure, a firm aims to maximize the earnings per share (EPS) and as a result, maximize the firm's value in the market. This balance ensures that the cost of financing (debt and equity) is at its lowest, thereby maximizing the value of the assets which, in turn, reflects on the firm's market valuation.
From the options presented, an optimal capital structure will indeed maximize the earnings per share and maximize the value of the firm. It will also implicitly minimize the cost of capital since a high cost of capital can erode the firm's earnings and reduce its value. The value of assets is not directly mentioned but is tied to the overall value of the firm as the assets' performance is often reflected in the firm's valuation.
Therefore, the options that correctly complete the statement about what an optimal capital structure will do are:
- A. Maximize the earnings per share
- B. Maximize the value of the firm
- D. Minimize the cost of capital