Which of the following statements is CORRECT?
A) the capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share.
B) the capital structure that maximizes the stock price is also the capital structure that maximizes the firm's times interest earned (tie) ratio.
C) increasing a company's debt ratio will typically reduce the marginal costs of both debt and equity financing; however, this still may raise the company's wacc.
D) if congress were to pass legislation that increases the personal tax rate but decreases the corporate tax rate, this would encourage companies to increase their debt ratios.
E) the capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (wacc).

Question

Quizplus · Accepted Answer

The statement that the capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC) is correct. This is because the optimal capital structure is the one that balances the cost of debt and equity financing so as to minimize the overall cost of capital while maximizing the value of the firm. WACC is the average cost of all the sources of financing used by the firm, and minimizing it is essential for maximizing the stock price.

Which of the Following Statements Is CORRECT