For a typical corporation,which of the following capital structures will result in the lowest weighted average cost of capital?
A) 40% debt, 20% preferred stock, 40% common equity
B) 50% debt, 10% preferred stock, 40% common equity
C) 60% debt, 10% preferred stock, 30% common equity
D) 60% debt, 15% preferred stock, 25% common equity

Question

Quizplus · Accepted Answer

A higher debt-to-equity ratio generally leads to a lower WACC, as debt is a cheaper source of financing for corporations due to tax benefits. Additionally, the use of preferred stock in the capital structure can also lower the cost of capital as it is less risky than common equity. Therefore, option D with 60% debt, 15% preferred stock, and 25% common equity would result in the lowest WACC.

For a Typical Corporation,which of the Following Capital Structures Will