The optimal capital structure is the one that maximizes the price of the stock,which always calls for a debt/asset ratio that is lower than the one that maximizes EPS.

Question

Quizplus · Accepted Answer

The statement is true. Maximizing EPS may require taking on more debt to benefit from the tax shield, but a high debt/asset ratio also increases financial risk and reduces shareholder value, ultimately lowering the stock price. Therefore, the optimal capital structure is a balance between debt and equity that maximizes the overall value of the firm and the price of the stock.

The Optimal Capital Structure Is the One That Maximizes the Price