In theory, a firm should maintain financial leverage consistent with a capital structure that ________.
A) meets the industry standards
B) meets the investor expectations
C) maximizes the owner's wealth
D) maximizes dividends

Question

Quizplus · Accepted Answer

A firm should maintain financial leverage consistent with a capital structure that maximizes the owner's wealth. This means that the firm should strive to find the optimal balance between debt and equity financing that maximizes the value of the firm's shares for its shareholders. This can be achieved through various financial analysis techniques such as cost of capital, net present value, and internal rate of return. Meeting industry standards or investor expectations may not necessarily result in a capital structure that maximizes owner's wealth. Maximizing dividends is also not the primary goal, as the firm should prioritize reinvesting profits into the business to drive future growth and value creation.

In Theory, a Firm Should Maintain Financial Leverage Consistent with a Capital