The ________ approach to capital structure proposes that an optimal capital structure be selected which ________.
A) M and M; maximizes the weighted average cost of capital
B) traditional; minimizes the cost of debt
C) EBIT-EPS; maximizes the EPS
D) residual theory; minimizes dividends

Question

Quizplus · Accepted Answer

The EBIT-EPS approach to capital structure proposes that an optimal capital structure be selected which maximizes the EPS (earnings per share) by determining the level of debt that will minimize the cost of financing without jeopardizing the firm's ability to meet its obligations. This approach evaluates the impact of different capital structures on the firm's EBIT (earnings before interest and taxes) and EPS to identify the most suitable mix of debt and equity.

The ________ Approach to Capital Structure Proposes That an Optimal