Which of the following statements is CORRECT?
A) the capital structure that minimizes a firm's weighted average cost of capital is also the capital structure that maximizes its stock price.
B) the capital structure that minimizes the firm's weighted average cost of capital is also the capital structure that maximizes its earnings per share.
C) if a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its wacc.
D) other things held constant, if corporate tax rates declined, then the modigliani-miller tax-adjusted tradeoff theory would suggest that firms should increase their use of debt.
E) a firm can use retained earnings without paying a flotation cost. therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt.

Question

Quizplus · Accepted Answer

The capital structure that minimizes a firm's weighted average cost of capital is also the capital structure that maximizes its stock price. This is because a lower WACC indicates that the company is using cheaper sources of funds to finance its operations, which increases its profitability and attractiveness to investors, leading to a higher stock price.

Which of the Following Statements Is CORRECT