The capital structure that maximizes the value of a company also:
A) minimizes financial distress costs.
B) minimizes the cost of capital.
C) maximizes the present value of the tax shield on debt.
D) maximizes the value of the debt.
E) maximizes the present value of the bankruptcy costs.

Question

Quizplus · Accepted Answer

The capital structure that maximizes the value of a company is the one that minimizes the cost of capital. This is because the cost of capital is the rate at which the company borrows money, and a company that can borrow money at lower rates can invest in more profitable opportunities, increasing its value. While minimizing financial distress costs and maximizing the present value of the tax shield on debt are important considerations in choosing a capital structure, they are not the main objective. Maximizing the value of the debt and the present value of bankruptcy costs are not desirable outcomes.

The Capital Structure That Maximizes the Value of a Company