Optimal capital structure is the capital structure at which the weighted average cost of capital is minimized, thereby maximizing the firm's value.

Question

Quizplus · Accepted Answer

Optimal capital structure theory states that there is a particular mix of debt and equity that minimizes the weighted average cost of capital (WACC), and therefore maximizes the firm's value. This is achieved by finding the right balance between the tax benefits of debt and the costs associated with financial distress and bankruptcy.

Optimal Capital Structure Is the Capital Structure at Which the Weighted