According to the traditional approach to capital structure, the value of the firm will be maximized when
A) the financial leverage is maximized.
B) the cost of debt is minimized.
C) the weighted average cost of capital is minimized.
D) the dividend payout is maximized.

Question

Quizplus · Accepted Answer

The traditional approach to capital structure suggests that the value of the firm will be maximized when the weighted average cost of capital (WACC) is minimized. This is because WACC reflects the cost of both debt and equity financing, and minimizing it helps to minimize the overall cost of funding for the firm. While maximizing financial leverage may increase returns, it also increases risk and can lead to financial distress or bankruptcy. Minimizing the cost of debt is a good goal, but it may not necessarily lead to maximum firm value. Maximizing dividend payout may benefit shareholders, but it may not necessarily lead to firm value maximization.

According to the Traditional Approach to Capital Structure, the Value