The optimal capital structure has been achieved when the:
A)weight of equity is equal to the weight of debt.
B)debt-equity ratio is equal to 1.
C)debt-equity ratio selected results in the lowest possible weighted average cost of capital.
D)debt-equity ratio is such that the cost of debt exceeds the cost of equity.
E)cost of equity is maximized given a pre-tax cost of debt.

Question

Quizplus · Accepted Answer

The optimal capital structure is achieved when the debt-equity ratio selected results in the lowest possible weighted average cost of capital (WACC). This means that the company is using the right amount of debt and equity financing to minimize its overall cost of capital. A debt-equity ratio of 1 (option B) may not necessarily result in the lowest WACC, and options A, D, and E do not consider the overall cost of capital.

The Optimal Capital Structure Has Been Achieved When The