CFA Level I · CFA Level I Exam · Capital Structure
A company's target capital structure is most likely to be:
A target capital structure is the mix of debt and equity a company aims to maintain over time, usually to minimize its weighted average cost of capital. It is not simply the current balance sheet mix, and it is not chosen only to reduce taxes.
- Athe mix of debt and equity it aims to maintain over timeCorrect
- Bthe capital structure shown on its most recent balance sheet
- Cthe mix of financing that minimizes its current tax payments
Explanation
A target capital structure is the proportion of debt and equity management aims to maintain over the long run, usually to minimize the weighted average cost of capital and maximize firm value. The current balance sheet mix can differ from the target, and minimizing taxes alone ignores financial distress costs and other factors.
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