CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Capital Structure
Which of the following is a feature of an optimal capital structure?
An optimal capital structure is the debt-equity mix that minimises the weighted average cost of capital and thereby maximises the market value of the firm. Maximising debt is not optimal because greater financial risk eventually raises the cost of capital.
- AIt minimises the weighted average cost of capital and maximises firm valueCorrect
- BIt has the highest possible proportion of debt
- CIt has no fixed financial obligations
- DIt maximises the cost of equity
Explanation
An optimal capital structure balances debt and equity to give the lowest overall cost of capital, which maximises firm value. Maximum debt raises financial risk and is not optimal.
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