The optimal capital structure of a firm maximizes the value of the firm while:
A) Maximizing the interest tax shield.
B) Minimizing the firm's cost of capital.
C) Equating the level of debt to the level of equity.
D) Minimizing the debt-equity ratio.
E) Minimizing the financial distress costs.

Question

Quizplus · Accepted Answer

The optimal capital structure minimizes the firm's cost of capital, which in turn maximizes the firm's value by balancing the benefits of debt (like tax shields) against the costs (like financial distress).

The Optimal Capital Structure of a Firm Maximizes the Value