What is optimal capital structure?
A)It is the mix of debt, preferred stock and common equity that maximizes profits.
B)It is the mix of debt, preferred stock and common equity that minimizes risk.
C)It is the mix of debt, preferred stock and common equity that minimizes the weighted cost of the firm's employed capital.
D)It is the mix of common and preferred stock that maximizes dividends to the stockholders.

Question

Quizplus · Accepted Answer

Optimal capital structure is the combination of debt, preferred stock, and common equity that minimizes the weighted cost of capital. It is the balance between the benefits and costs of different sources of financing. Minimizing the cost of capital maximizes the value of the firm to its shareholders. Therefore, option C is the correct answer. Option A and D are incorrect because maximizing profits and dividends may not be the best strategy for the long-term survival and growth of the firm. Option B is incorrect because minimizing risk is not the only objective of the optimal capital structure.

What Is Optimal Capital Structure