Which of the following statements is CORRECT?
A)The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC).
B)The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share.
C)The capital structure that maximizes the stock price is also the capital structure that maximizes the firm's times interest earned (TIE) ratio.
D)Increasing a company's debt ratio will typically reduce the marginal costs of both debt and equity financing; however, this still may raise the company's WACC.
E)If Congress were to pass legislation that increases the personal tax rate but decreases the corporate tax rate, this would encourage companies to increase their debt ratios.

Question

Quizplus · Accepted Answer

The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC). This is because the WACC is a weighted average of the cost of equity and the cost of debt, and as such, minimizing the WACC requires finding the optimal mix of debt and equity that minimizes the overall cost of capital. The optimal capital structure, therefore, is the one that balances the costs and benefits of debt and equity financing to maximize the firm's stock price.

Which of the Following Statements Is CORRECT