A firm's optimal capital structure is the combination of debt financing and equity financing that ______.
A)maximizes its expected earnings per share (EPS).
B)simultaneously maximizes its EPS and minimizes its weighted average cost of capital (WACC).
C)minimizes its cost of equity, which is a necessary condition for maximizing the firm's stock price.
D)simultaneously minimizes its cost of debt, its cost of equity, and its WACC.
E)maximizes its stock price.

Question

A firm's optimal capital structure is the combination of debt financing and equity financing that ______. 
A)maximizes its expected earnings per share (EPS).
B)simultaneously maximizes its EPS and minimizes its weighted average cost of capital (WACC).
C)minimizes its cost of equity, which is a necessary condition for maximizing the firm's stock price.
D)simultaneously minimizes its cost of debt, its cost of equity, and its WACC.
E)maximizes its stock price.

Quizplus · Accepted Answer

The optimal capital structure is the one that maximizes the firm's stock price, as it reflects the best balance of risk and return for shareholders.

A Firm's Optimal Capital Structure Is the Combination of Debt