Which of the following statements is CORRECT?
A) The capital structure that minimizes the interest rate on debt also maximizes the expected EPS.
B) The capital structure that minimizes the required return on equity also maximizes the stock price.
C) The capital structure that minimizes the WACC also maximizes the price per share of common stock.
D) The capital structure that gives the firm the best credit rating also maximizes the stock price.
E) The capital structure that maximizes expected EPS also maximizes the price per share of common stock.

Question

Quizplus · Accepted Answer

The WACC represents the overall cost of capital to the firm and reflects the risk-level of the company's capital structure. Therefore, the capital structure that minimizes the WACC also reflects an optimal balance between the cost of debt and the cost of equity funding, which in turn maximizes the market value of the firm and the price per share of common stock. The other statements are not necessarily true, as maximizing EPS or minimizing the required return on equity may not always lead to maximized shareholder value.

Which of the Following Statements Is CORRECT