The optimal capital structure has been achieved when the
A)weight of equity is equal to the weight of debt.
B)debt-equity ratio selected results in the lowest possible weighted average cost of capital.
C)firm is totally financed with debt.
D)debt-equity ratio is such that the cost of debt exceeds the cost of equity.
E)cost of equity is maximized.

Question

Quizplus · Accepted Answer

The optimal capital structure is the one that results in the lowest possible weighted average cost of capital (WACC). This means that the debt-equity ratio has been chosen in a way that minimizes the overall cost of capital for the firm. When the cost of capital is minimized, the value of the firm is maximized, and investors are willing to pay more for its shares. This results in increased shareholder wealth. Therefore, B is the best choice.

The Optimal Capital Structure Has Been Achieved When the