A firm sets a target capital structure to use when raising new funds in an effort to:
A)maximize its earnings per share (EPS).
B)minimize its cost of debt (rd).
C)maximize the dividend per share it pays commons stockholders.
D)minimize its cost of equity (rs).
E)minimize its weighted average cost of capital (WACC).

Question

Quizplus · Accepted Answer

The main goal of setting a target capital structure is to minimize the weighted average cost of capital (WACC). By achieving the optimal mix of debt and equity, a firm can minimize its overall cost of capital and maximize shareholder value. Option A is incorrect because maximizing EPS may not always align with maximizing shareholder value. Option B is incorrect because minimizing the cost of debt alone may not necessarily result in the lowest WACC. Option C is incorrect because maximizing dividend per share may not be the most optimal use of resources for a firm. Option D is incorrect because minimizing the cost of equity alone may not result in the lowest WACC.

A Firm Sets a Target Capital Structure to Use When