Question

The firm’s target capital structure should be consistent with which of the following statements?Select one:a. Obtain the highest possible bond rating.b. Maximize the earnings per share (EPS).c. Minimize the cost of equity (rs).d. Minimize the weighted average cost of capital (WACC).e. Minimize the cost of debt (rd).

Answer 1

A firm's target capital structure should minimize the weighted average cost of capital.

The correct answer is D

Step-by-step explanation:

The maximization of earnings per share does not determine the optimal capital structure of a firm.

The minimization of cost of equity indicates that a firm pays a lower return to common stockholders. It does not impact on a firm's capital structure.

The minimization of weighted average cost of capital impacts on the target capital structure of a company because it maximizes the value of a firm. It determines a firm's target capital structure. This situation is referred to as optimal capital structure.

The minimization of cost of debt only reduces the return offered by a firm to debenture holders. It does not determine a firm's target capital structure.