The firm's target capital structure should do which of the following? A) Maximize the earnings per share (EPS). B) Minimize the cost of debt (r_d). C) Obtain the highest possible bond rating. D) Minimize the cost of equity (r_s). E) Minimize the weighted average cost of capital (WACC).

Question

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The target capital structure should aim to minimize the weighted average cost of capital (WACC), which is the average cost of the firm's capital sources weighted by their relative proportions in the capital structure. This is because a lower WACC indicates a lower cost of financing for the firm, which can improve profitability and shareholder value. Maximizing EPS or obtaining the highest possible bond rating may not necessarily lead to a lower WACC. Minimizing the cost of debt or equity may be important considerations, but they should be balanced against the overall goal of minimizing WACC.

The Firm's Target Capital Structure Should Do Which of the Following