Which of the following statements is CORRECT?
A) The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share.
B) The capital structure that maximizes the stock price is also the capital structure that maximizes the firm's times interest earned (TIE) ratio.
C) 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.
D) 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.
E) The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC).

Question

Quizplus · Accepted Answer

The capital structure that minimizes the weighted average cost of capital (WACC) is the optimal capital structure, which also maximizes the stock price. This is because a lower WACC implies a higher present value of future cash flows, which leads to a higher stock price. Therefore, options A, B, C, and D are incorrect.

Which of the Following Statements Is CORRECT