What should the firm's target capital structure be set to do? A) Maximize the earnings per share (EPS). B) Minimize the cost of debt (r_d). C) Minimize the cost of equity (r_s). D) Minimize the weighted average cost of capital (WACC).

Question

Quizplus · Accepted Answer

The target capital structure should be set to minimize the weighted average cost of capital (WACC). This is because minimizing the WACC will lead to maximizing the firm's value and profitability. Maximizing EPS or minimizing the cost of debt/equity alone may not necessarily lead to maximizing the firm's value.

What Should the Firm's Target Capital Structure Be Set to Do