An optimal capital structure is achieved
A) when a firm's expected profits are maximized.
B) when a firm's expected EPS are maximized.
C) when a firm's break-even point is achieved.
D) when a firm's weighted average cost of capital is minimized.

Question

Quizplus · Accepted Answer

An optimal capital structure is achieved when a firm's weighted average cost of capital (WACC) is minimized. This means finding the right balance between debt and equity financing that minimizes the overall cost of capital for the company. This is important because a lower WACC means the company can invest in more projects with a positive net present value, which in turn increases the value of the company for its shareholders. Maximizing profits or EPS may not necessarily lead to the lowest WACC or optimal capital structure.

An Optimal Capital Structure Is Achieved