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7 The optimal capital structure refers to: A. having more preferred stock financing relative to common...

7 The optimal capital structure refers to:

A. having more preferred stock financing relative to common stock financing.

B. the idea that there is a specific weighting of debt and equity financing which results in the lowest cost of capital.

C. issuing the optimal amount of convertible bonds.

D. paying the highest stock dividend allowable.

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Answer #1

The Optimal capital structure refers to:

B. the idea that there is specific weighting of debt and equity financing which results in the lowest cost of capital.

The purpose of optimizing the Capital structure is to achieve a debt – equity ratio with maximizes the value of the company. Value of company can be increased by reducing or optimizing its cost of capital. So, optimal capital structure refers to the specific debt-equity ratio which is the lowest cost of capital.

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