Capital Structure Theory in general assumes that?
A)A firm's value is determined by capitalizing (discounting)the firm's expected net income by the firm's cost of equity.
B)A firm's cost of capital rises as a firm uses more financial leverage.
C)A firm's value is determined by discounting the firm's expected cash flows by the WACC.
D)A firm's cash flows will grow indefinitely at a constant rate.

Question

Quizplus · Accepted Answer

Capital Structure Theory assumes that a firm's value is determined by discounting the firm's expected cash flows by the weighted average cost of capital (WACC). This theory also suggests that a firm's optimal capital structure is one that minimizes the WACC, which is achieved when the cost of debt equals the cost of equity, and maximizes the firm's value. Option A is incorrect because a firm's value is determined by discounting expected cash flows, not net income. Option B is incorrect because the cost of capital may rise or fall as a firm uses more financial leverage, depending on the riskiness of its projects. Option D is not a feature of Capital Structure Theory.

Capital Structure Theory in General Assumes That