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

Answer 1

Answer: b. The optimal capital structure simultaneously maximizes stock price and minimizes the WACC

Explanation:

The optimal capital structure is simply defined as the capital structure of a company that's made up of debt and equity which helps a business in achieving its aim.

The optimal capital structure simultaneously maximizes stock price and minimizes the WACC. As economic agents always look out to maximize stock price, it should be noted that this can be achieved with a cost of capital that's at its minimum.