The optimal capital structure is the mixture of debt and equity which maximizes the value of the ﬁrm
and Minimizes the ﬁrm's weighted average cost of capital.

Question

Quizplus · Accepted Answer

The statement is true. The optimal capital structure is the one that balances the benefits of debt (tax shields and lower cost of capital) with the costs of debt (increased risk of bankruptcy and financial distress). This balance results in a lower cost of capital and higher value for the firm.

The Optimal Capital Structure Is the Mixture of Debt and Equity