Question

In theory, the capital structure should be set to:

Question options:

	minimize the weighted average cost of capital.
	the industry standard.
	minimize the cost of equity.
	minimize risk.

Answer 1

Option - minimize the weighted average cost of capital

Capital structure should be set to Optimal. This optimal capital structure for a company is the one where the company uses an ideal mix of equity capital and debt (debt-to-equity ratio). This mix of capital is considered ideal as the cost of capital is the lowest at this point.

Although debt offers lower cost of capital due to tax benefit associated with interest payment; however, a company's risk generally increases as debt increases, and the company may succumb to higher interest payments with increase in debt.