According to the traditional approach to capital structure, the value of the firm will be maximized when
A) the dividend payout is maximized.
B) the weighted average cost of capital is minimized.
C) the cost of debt is minimized.
D) the financial leverage is maximized.

Question

Quizplus · Accepted Answer

According to the traditional approach to capital structure, the value of the firm will be maximized when the weighted average cost of capital is minimized. This is because the cost of capital is the minimum return that investors require to invest their funds in the company. Therefore, minimizing the weighted average cost of capital would result in maximizing the value of the firm. Maximizing dividend payout or financial leverage may not necessarily lead to maximizing the value of the firm, while minimizing cost of debt may not take into account the overall cost of capital.

According to the Traditional Approach to Capital Structure, the Value