The optimal capital structure is the funds mix that will
A) minimize the use of debt.
B) achieve an equal proportion of debt, preferred stock, and common equity.
C) minimize the firm's composite cost of capital.
D) maximize total leverage.

Question

Quizplus · Accepted Answer

The optimal capital structure is the one that minimizes the firm's composite cost of capital, which is the weighted average cost of debt, preferred stock, and common equity. This means that the firm must strike a balance between minimizing the cost of capital and maintaining an appropriate level of risk. Minimizing the use of debt (A) or maximizing total leverage (D) may not be the best strategy for achieving this optimal capital structure. Achieving an equal proportion of debt, preferred stock, and common equity (B) may not be feasible or desirable for some firms, as their capital structure requirements will depend on their business, industry, and financial circumstances.

The Optimal Capital Structure Is the Funds Mix That Will