All of the following statements are correct except:
A) The firm’s optimum debt/equity mix minimizes the firm’s cost of capital, which in turn helps the firm to maximize shareholder wealth
B) A firm’s mix of debt and equity used to finance its assets defines the firm’s capital structure.
C) A nonoptimal capital structure with either too much or too little debt leads to higher financing costs, and the firm will likely reject some capital budgeting projects that could have increased shareholder wealth with an optimal financing mix.
D) A project’s NPV represents the increase in shareholders’ wealth from undertaking a project; thus, a lower weighted average cost of capital gives higher project net present values and results in higher levels of shareholder wealth.
E) All of the above statements are correct.

Question

All of the following statements are correct except:
A)	The firm’s optimum debt/equity mix minimizes the firm’s cost of capital, which in turn helps the firm to maximize shareholder wealth
B)	A firm’s mix of debt and equity used to finance its assets defines the firm’s capital structure.
C)	A nonoptimal capital structure with either too much or too little debt leads to higher financing costs, and the firm will likely reject some capital budgeting projects that could have increased shareholder wealth with an optimal financing mix.
D)	A project’s NPV represents the increase in shareholders’ wealth from undertaking a project; thus, a lower weighted average cost of capital gives higher project net present values and results in higher levels of shareholder wealth.
E)	All of the above statements are correct.

Quizplus · Accepted Answer

All the statements A, B, C, and D are correct regarding capital structure, cost of capital, and their impact on shareholder wealth.

All of the Following Statements Are Correct Except