When choosing a capital structure, the objective of the ﬁrm should be to:
A) Choose the one that maximizes the current value of the ﬁrm's bonds.
B) Choose the one that minimizes the value of the ﬁrm.
C) Choose the one that minimizes the ﬁrm's WACC.
D) Choose the one that results in the largest interest tax shield.
E) Choose any capital structure since it is always irrelevant.

Question

Quizplus · Accepted Answer

The objective of choosing a capital structure is to minimize the firm's cost of capital, which is measured by the weighted average cost of capital (WACC). Therefore, the best choice is to choose the capital structure that minimizes the firm's WACC. Option A is incorrect because the objective is not to maximize the value of the firm's bonds, but to maximize the overall value of the firm. Option B is incorrect because the objective is not to minimize the value of the firm, but to find the optimal capital structure that maximizes the value of the firm. Option D is incorrect because the objective is not just to maximize the interest tax shield, but to find a balance of debt and equity that minimizes the firm's cost of capital. Option E is incorrect because the choice of capital structure can have a significant impact on a firm's cost of capital and overall value.

When Choosing a Capital Structure, the Objective of the ﬁRm