If a firm is operating at its optimal capital structure,then its weighted average cost of capital must be __________ and its value must be __________.
A) maximized; maximized
B) minimized; minimized
C) maximized; minimized
D) minimized; maximized
E) None of the above is a correct answer.

Question

Quizplus · Accepted Answer

The optimal capital structure is the mix of debt and equity that yields the lowest weighted average cost of capital (WACC), which is the average cost of financing the firm's assets. Therefore, if a firm is operating at its optimal capital structure, its WACC must be minimized. Moreover, the value of the firm is maximized at the optimal capital structure because it reflects the efficient use of capital and the maximization of shareholder wealth.

If a Firm Is Operating at Its Optimal Capital Structure,then