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

Question

Quizplus · Accepted Answer

The target capital structure of a firm should aim to minimize its weighted average cost of capital (WACC). This is because the WACC reflects the cost of all the sources of financing used by the company, including both debt and equity. By minimizing the WACC, the firm can maximize the value of its investments for its shareholders. Therefore, choice D is the best option as it aligns with this goal. Choices A, B, C, and E are not optimal because they do not consider the overall cost of capital or the firm's value creation for its shareholders.

The Firm's Target Capital Structure Should Be Consistent with Which