The optimal capital structure is the one that balances
A) return and risk factors in order to maximize profits.
B) return and risk factors in order to maximize market value.
C) return and risk factors in order to maximize earnings per share.
D) return and risk factors in order to maximize dividends.

Question

Quizplus · Accepted Answer

The optimal capital structure seeks to balance return and risk factors in order to maximize the market value of the firm. This means that the firm should strive to find the most efficient mix of debt and equity financing that minimizes the cost of capital while maximizing the value of the firm. Maximizing market value ultimately benefits all stakeholders of the firm, including shareholders, employees, and creditors. Therefore, option B is the best choice for the optimal capital structure.

The Optimal Capital Structure Is the One That Balances