Which one of these statements is correct?
A) Capital structure has no effect on shareholder value.
B) The optimal capital structure occurs when the cost of equity is minimized.
C) The optimal capital structure maximizes shareholder value.
D) Shareholder value is maximized when WACC is also maximized.
E) Unlevered firms have more value than levered firms when firms are profitable.

Question

Quizplus · Accepted Answer

The optimal capital structure is the one that maximizes shareholder value. This means finding the right balance between debt and equity financing that balances the tax advantages of debt with the risk associated with higher levels of debt, ultimately leading to maximized shareholder value. Choices A, B, D, and E are incorrect because capital structure does have an effect on shareholder value, the optimal capital structure is not only about minimizing the cost of equity but balancing debt and equity, shareholder value is not maximized when WACC is maximized, and levered firms can have more value than unlevered firms depending on profitability.

Which One of These Statements Is Correct