The firm's target capital structure should do which of the following?
A) Maximize the earnings per share (EPS).
B) Minimize the cost of debt (rd).
C) Obtain the highest possible bond rating.
D) Minimize the cost of equity (rs).
E) Minimize the weighted average cost of capital (WACC).

Question

Quizplus · Accepted Answer

The target capital structure should aim to minimize the weighted average cost of capital (WACC), as this represents the cost of financing for the firm. This means that the firm should strive to find a balance between the cost of debt and equity financing to minimize the overall cost of financing. Maximizing earnings per share (EPS), obtaining the highest possible bond rating, and minimizing the cost of debt or equity individually may not necessarily result in the lowest WACC.

The Firm's Target Capital Structure Should Do Which of the Following