A nonoptimal capital structure may lead the firm to reject some capital budgeting projects that could have increased shareholder wealth with an optimal financing mix.

Question

Quizplus · Accepted Answer

A nonoptimal capital structure may result in higher cost of capital and potential financial distress, which can lead to the rejection of otherwise profitable projects due to lack of funding. An optimal capital structure, on the other hand, can enhance the firm's ability to undertake value-creating opportunities while maximizing shareholder wealth.

A Nonoptimal Capital Structure May Lead the Firm to Reject