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

Question

Quizplus · Accepted Answer

The goal of financial management is to maximize the value of the firm, and the capital structure decision plays an important role in achieving this goal. A correctly chosen capital structure can lower the cost of capital and increase the value of the firm. However, if the firm chooses an excessively high level of debt, the costs associated with financial distress may offset the benefits of the lower cost of capital. Therefore, the optimal capital structure is one that balances the benefits and costs of debt financing and maximizes the overall value of the firm.

A ﬁRm Should Select the Capital Structure Which