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

Question

Quizplus · Accepted Answer

The capital structure that minimizes the weighted average cost of capital (WACC) also maximizes the value of the firm and therefore the price per share of common stock. This is because lowering the WACC reduces the discount rate used to value the firm's future cash flows, which increases its present value and ultimately the stock price. Maximizing expected EPS may not necessarily lead to maximizing the stock price, as EPS does not take into account the cost of capital. Minimizing the interest rate on debt may not be possible while maintaining an optimal capital structure, and may not necessarily lead to maximizing expected EPS or the stock price. Minimizing the required return on equity may not be possible without increasing the firm's financial risk and may not necessarily lead to maximizing the stock price. While having a good bond rating is desirable, it does not necessarily translate into maximizing the stock price.

Which of the Following Statements Is CORRECT