As a general rule, the capital structure that:
A) minimizes the cost of equity also maximizes the stock price
B) maximizes the stock price also minimizes the weighted average cost of capital
C) minimizes the cost of debt also maximizes the expected earnings per share
D) increases operating leverage for a given quantity of output, increases business risk

Question

Quizplus · Accepted Answer

The capital structure that maximizes the stock price also minimizes the weighted average cost of capital. This is because as the firm takes on more debt, the cost of debt is generally lower than the cost of equity, leading to a lower overall weighted average cost of capital. This lower cost of capital allows the firm to invest in profitable projects and increase the value of the company, which in turn increases the stock price.

As a General Rule, the Capital Structure That