The optimal capital structure:
A) Will be the same for all ﬁrms in the same industry.
B) Will remain constant over time unless the ﬁrm does an acquisition.
C) Of a ﬁrm will vary over time as taxes and market conditions change.
D) Places more emphasis on the operations of a ﬁrm rather than the ﬁnancing of a ﬁrm.
E) Is unaffected by changes in the ﬁnancial markets.

Question

Quizplus · Accepted Answer

The optimal capital structure of a firm will vary over time as taxes and market conditions change. Factors such as interest rates, market volatility, and changes in tax laws can impact the cost of debt and equity financing, as well as the risk associated with each. As a result, companies may adjust their capital structure to maintain an optimal balance between debt and equity that minimizes their cost of capital while maximizing shareholder value. Therefore, option C is the best choice.

The Optimal Capital Structure