The firm's optimal capital structure is the mix of financing sources that
A) minimizes the risk of financial distress.
B) maximizes after-tax earnings.
C) maximizes the total value of the firm's debt and equity.
D) maximizes favorable leverage.

Question

Quizplus · Accepted Answer

The main goal of the optimal capital structure is to maximize the total value of the firm's debt and equity. This is achieved by balancing the benefits of debt (tax shield, lower cost of capital) with the costs (risk of financial distress, higher interest payments). By finding the optimal mix of debt and equity financing, the firm can maximize its overall value.

The Firm's Optimal Capital Structure Is the Mix of Financing