firm's target capital structure should be consistent with which of the following statements?
A)Maximize the earnings per share (EPS).
B)Minimize the cost of debt (rd).
C)Obtain the highest possible bond rating.
D)Minimize the cost of equity (rs).
E)Minimize the weighted average cost of capital (WACC).

Question

Quizplus · Accepted Answer

The target capital structure should be consistent with minimizing the weighted average cost of capital (WACC). This is because WACC captures the cost of all the sources of financing, including equity and debt, and represents the minimum return that the firm must earn on its investments to satisfy all of its investor groups. Thus, minimizing WACC will lead to maximizing the firm's value. The other choices (A, B, C, D) are too narrow in their focus and do not consider the overall cost of capital for the firm.

Firm's Target Capital Structure Should Be Consistent with Which of the Following