The optimal capital structure:
A)is identical for all firms in the same industry.
B)will remain constant over time unless the firm makes an acquisition.
C)of a particular firm can change if tax rates change.
D)places more emphasis on the operations of a firm rather than the financing of a firm.
E)is unaffected by changes in the financial markets.

Question

Quizplus · Accepted Answer

The optimal capital structure of a particular firm can change if tax rates change, as this affects the cost of debt and the overall cost of capital. Therefore, a firm's ideal mix of debt and equity financing may shift as tax rates fluctuate. The other options are incorrect as the optimal capital structure can vary between firms and industries, can change over time due to factors other than an acquisition, places equal emphasis on both operations and financing, and is influenced by changes in financial markets.

The Optimal Capital Structure