Question

1. The firm's target capital structure should be consistent with which of the following statements? Maximize the earnings per share (EPS). Minimize the cost of debt (rd). Obtain the highest possible bond rating. Minimize the cost of equity (rs). Minimize the weighted average cost of capital (WACC).

Answer 1

Answer:

Minimize the weighted average cost of capital (WACC).

Explanation:

The weighted average cost of capital (WACC) is the interest rate at which a company leverages its activities. The WACC includes the cost of debt (i.e. bonds and loans) and equity (i.e. common stock and retained earnings). It is calculated by multiplying each capital source by its interest rate and then adding the results.

A company should try to have the lowest WACC possible, since a lower interest rate equals higher profits.