CS Executive · Corporate Accounting and Financial Management · Capital Structure
Which one of the following is a feature of an optimal capital structure as taught in financial management?
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. It balances risk and return, rather than chasing EPS or avoiding debt entirely.
- AIt maximises the overall cost of capital to protect creditors
- BIt maximises the market value of the firm by minimising the weighted average cost of capitalCorrect
- CIt uses only equity, so that no fixed charges arise
- DIt maximises earnings per share irrespective of risk
Explanation
An optimal capital structure balances risk and return so that the WACC is minimum and firm value is maximum. Maximising EPS ignoring risk is not the objective, since higher debt raises financial risk. Using only equity usually leaves tax-shield benefits unused.
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