As a general rule, the optimal capital structure
A) maximizes expected EPS and also maximizes the price per share of common stock.
B) minimizes the interest rate on debt and also maximizes the expected EPS.
C) minimizes the required rate on equity and also maximizes the stock price.
D) maximizes the price per share of common stock and also minimizes the weighted average cost of capital.

Question

Quizplus · Accepted Answer

The optimal capital structure aims to balance the company's cost of capital and the risk it faces. This is accomplished by maximizing the price per share of common stock and minimizing the weighted average cost of capital. By doing so, the company is able to maximize the value of its investments, which in turn helps to increase the value of its stock. While choosing a capital structure that maximizes expected EPS or minimizes the required rate on equity may be beneficial, neither of these focus on the overall cost of capital or the risk associated with that capital structure.

As a General Rule, the Optimal Capital Structure