Question

A company’s capital structure decisions address the ways a firm’s assets are financed (using debt, preferred stock, and common equity capital) and is often presented as a percentage of the type of financing used. As with all financial decisions, the firm should try to set a capital structure that maximizes the stock price, or shareholder value. This is called the optimal capital structure. Which of the following statements regarding a firm’s optimal capital structure is true? The optimal capital structure maximizes the firm’s cost of equity. The optimal capital structure maximizes the firm’s earnings per share (EPS). The optimal capital structure maximizes the firm’s cost of debt. The optimal capital structure minimizes the firm’s weighted average cost of capital.

Answer 1

Option D (The optimal........capital) would be the right choice.

Step-by-step explanation:

• The optimal composition of capital would be the one with the lowest average capital structure.
• Such alternatives are meaningless since the optimal capital structure is not reflected by them. Maximizing earnings growth, interest burdens, or equity burdens would not enhance the worth including its shareholder.