Which of the following statements is CORRECT? a. The optimal capital structure m

Question

Which of the following statements is CORRECT?

a. The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price. b. As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS. c. The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC. d. The optimal capital structure simultaneously maximizes the stock price and minimizes the WACC. e. The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.

Explanation / Answer

Answer) The answer to the following question is the optimal capital structure simultaneously maximizes the stock price and minimizes the WACC.

This is because as a firm we alway would look to maximize our stock price or the value of the firm this can only be done when the WACC is minimum i.e the cost of capital. Hence all firms look for that ideal wacc to discount free cashflows to maximize firm value.

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