A firm should select the capital structure which:
A)produces the highest cost of capital.
B)has no debt.
C)is fully unlevered.
D)minimizes taxes.
E)maximizes the value of the firm.

Question

Quizplus · Accepted Answer

The goal of a firm is to maximize shareholder wealth, and the capital structure decision has a direct impact on the value of the firm. Therefore, the optimal capital structure is the one that maximizes the value of the firm, which is achieved by finding the right balance between debt and equity. This balance is different for every firm and depends on factors such as the firm's cash flows, assets, risk, and market conditions. Minimizing taxes or having no debt may seem attractive, but they do not necessarily maximize the value of the firm. Therefore, option E is the best answer.

A Firm Should Select the Capital Structure Which