According to the traditional approach to capital structure, the value of a firm will be maximized when ________.
A) the financial leverage is maximized
B) the cost of debt is minimized
C) the weighted average cost of capital is minimized
D) the dividend payout is maximized

Question

Quizplus · Accepted Answer

The traditional approach to capital structure suggests that a firm's value will be maximized when its weighted average cost of capital (WACC) is minimized. This can be achieved by balancing the use of debt and equity financing to optimize the cost of capital. While maximizing financial leverage may increase the return on equity, it also increases the cost of debt and increases the risk of financial distress. Minimizing the cost of debt is important, but it is only one factor in the overall cost of capital. Maximizing dividend payout may also benefit shareholders, but it does not necessarily lead to maximizing the overall value of the firm.

According to the Traditional Approach to Capital Structure, the Value