The optimal capital structure will always be lower than the debt/assets ratio that maximizes the _____.
A) expected EPS
B) weighted average cost of capital
C) beta coefficients
D) degree of financial leverage
E) net operating income

Question

Quizplus · Accepted Answer

The optimal capital structure will always be lower than the debt/assets ratio that maximizes the expected EPS. This is because the expected EPS is maximized when the weighted average cost of capital is minimized. The weighted average cost of capital is a function of the debt/assets ratio, and it increases as the debt/assets ratio increases. Therefore, the optimal capital structure will always be lower than the debt/assets ratio that maximizes the expected EPS.

The Optimal Capital Structure Will Always Be Lower Than the Debt/assets