Which of the following is a lesson gleaned from the empirical evidence that a CFO might find useful in determining his own firm's capital structure?
A)CFOs should simply copy the capital structure of their firm's peers since the optimal capital structure seems to be the same for firms within the same industry.
B)The failure to rebalance his firm's capital structure when market forces change it is the sign of a bad manager.
C)The decision whether to rebalance a firm's capital structure, if necessary, when market forces change it should be based on a cost-benefit analysis.
D)Capital structure is irrelevant,which is why smart CFOs do not bother to rebalance their firm's capital structure when market forces change it.

Question

Quizplus · Accepted Answer

The lesson gleaned from the empirical evidence is that the decision to rebalance a firm's capital structure should be based on a cost-benefit analysis. This means that a CFO should consider the costs and benefits of adjusting the firm's capital structure when market forces change, and make a decision accordingly. Simply copying the capital structure of peers is not necessarily optimal for every firm, and failure to rebalance is not always a sign of bad management. The idea that capital structure is irrelevant is also not supported by the empirical evidence. Empirical evidence suggests that the optimal capital structure is not the same for all firms within the same industry, making copying the capital structure of peers an ineffective strategy. It is also not necessarily a sign of bad management if a firm does not rebalance its capital structure when market forces change it. However, the decision to rebalance should be based on a cost-benefit analysis, weighing the costs of modifying the capital structure against the potential benefits it may bring. Therefore, choice C is the best option. Option D is also not correct as capital structure can have an impact on a firm's value and its ability to access external financing.

Which of the Following Is a Lesson Gleaned from the Empirical