The optimal ﬁrm value is achieved when the:
A) Present value of the bankruptcy cost is minimized.
B) The interest tax shield on debt is maximized.
C) Weighted average cost of capital is minimized.
D) Debt-equity ratio is maximized.
E) Total net gain from leverage is equal to zero.

Question

Quizplus · Accepted Answer

The optimal firm value is achieved when the weighted average cost of capital (WACC) is minimized. WACC takes into consideration the cost of debt and equity, and by minimizing it, the firm is able to optimize its financing mix and allocate capital efficiently. A and B are not correct because minimizing bankruptcy costs or maximizing interest tax shields do not necessarily lead to optimal firm value. D is incorrect because maximizing the debt-equity ratio can increase financial risk and lead to higher costs of capital. E is incorrect because the total net gain from leverage does not take into account the cost of capital and the overall impact on firm value.

The Optimal ﬁRm Value Is Achieved When The