The optimal capital structure:
A)will be the same for all ﬁrms in the same industry.
B)will remain constant over time unless the ﬁrm makes an acquisition.
C)of a ﬁrm will vary over time as taxes and market conditions change.
D)places more emphasis on the operations of a ﬁrm rather than the ﬁnancing of a ﬁrm.
E)is unaffected by changes in the ﬁnancial markets.

Question

Quizplus · Accepted Answer

The optimal capital structure of a firm is not a fixed, one-size-fits-all solution. It will vary over time as taxes and market conditions change. The best capital structure for a firm should balance the benefits of debt financing (i.e. tax-deductible interest payments) with the costs and risks associated with taking on too much debt. Therefore, it is important for a firm to periodically reassess its capital structure to ensure that it is still optimal given the current market conditions and the firm's financial position.

The Optimal Capital Structure