If a firm is operating at its optimal capital structure, then its weighted average cost of capital must be __________ and its value must be __________.

Question

Quizplus · Accepted Answer

When a firm is operating at its optimal capital structure, its weighted average cost of capital (WACC) should be minimised. This is because the optimal capital structure is the combination of debt and equity that results in the lowest WACC. Additionally, the firm's value should be maximised as a result of having an optimal capital structure, as the firm is able to take advantage of the tax benefits of debt while still maintaining an appropriate level of equity to mitigate risk. Therefore, the answer is D: minimised WACC and maximised value.

If a Firm Is Operating at Its Optimal Capital Structure