The capital structure that maximizes the value of a firm also:
A)minimizes financial distress costs.
B)minimizes the cost of capital.
C)maximizes the present value of the tax shield on debt.
D)maximizes the value of the debt.
E)maximizes the value of the unlevered firm.

Question

Quizplus · Accepted Answer

The capital structure that minimizes the cost of capital will also maximize the value of the firm. This is because the cost of capital represents the return that investors require in order to invest in the firm's securities. By minimizing this cost, the firm is able to maximize the value of its securities, and therefore maximize the overall value of the firm. While minimizing financial distress costs and maximizing the present value of the tax shield on debt may be important considerations in determining a firm's optimal capital structure, they are not necessarily the primary drivers of value maximization. Additionally, maximizing the value of the debt or the unlevered firm does not necessarily correspond to maximizing the overall value of the firm.

The Capital Structure That Maximizes the Value of a Firm