Asked by Marcos Medina Rodriguez on Jun 03, 2024
Verified
What should the firm's target capital structure be set to do?
A) maximize the earnings per share (EPS)
B) minimize the cost of debt (rd)
C) minimize the cost of equity (rs)
D) minimize the weighted average cost of capital (WACC)
Target Capital Structure
The optimal mix of debt, preferred stock, and common equity that a company aims to achieve for financing its operations and growth.
Weighted Average Cost
This is often used in the context of 'Weighted Average Cost of Capital (WACC)', which measures a company's cost of capital from all sources weighted by their relative use in the financial structure.
EPS
Earnings Per Share is a company's profit divided by the outstanding shares of its common stock, serving as an indicator of a company's profitability.
- Examine how a firm's capital composition influences its weighted average cost of capital (WACC) and market value.
Verified Answer
LW
Logan WenrickJun 07, 2024
Final Answer :
D
Explanation :
The primary objective of setting a target capital structure is to minimize the weighted average cost of capital (WACC). WACC represents the average cost of capital that a company must pay for all its financing sources. By minimizing the WACC, a company can maximize the value of its operations to shareholders. Therefore, D is the best choice. Maximizing EPS or minimizing the cost of debt or equity are not the primary objectives of setting a target capital structure.
Learning Objectives
- Examine how a firm's capital composition influences its weighted average cost of capital (WACC) and market value.