A policy of maximizing the value of the firm is the same as a policy of minimizing the weighted average cost of capital providing that
I.the firm's investment policy is settled;
II.there are no taxes;
III.an issue of new debt does not affect the market value of existing debt
A)I only
B)II only
C)III only
D)I, II, and III

Question

Quizplus · Accepted Answer

All three conditions must hold in order for maximizing the value of the firm to be equivalent to minimizing the weighted average cost of capital. If the firm's investment policy is not settled, then maximizing the value of the firm may lead to investments that require a higher cost of capital. If there are taxes, the cost of debt financing and the value of the firm may be affected. If an issue of new debt affects the market value of existing debt, then the cost of debt financing and the value of the firm may also be affected.

A Policy of Maximizing the Value of the Firm Is