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 favourable leverage.

Question

Quizplus · Accepted Answer

The optimal capital structure is the one that maximizes the total value of the firm's debt and equity, which in turn maximizes the value of the firm. This involves finding the right balance between debt and equity financing, that minimizes the cost of capital and maximizes the returns to shareholders. However, minimizing the risk of financial distress and maximizing after-tax earnings are important considerations, they do not necessarily lead to the optimal capital structure.

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