Answer to Question #6761 in Economics of Enterprise for LaMarcus Streeter

Question

1. Which of the following statements best describes the optimal capital structure?

a. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company’s earnings per share (EPS).
b. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company’s stock price.
c. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s cost of equity.
d. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s cost of debt.
e. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s cost of preferred stock.

Answer 1

d. The optimal capital structure is the mix of debt, equity, and preferred stock
that minimizes the company's cost of debt.
The smaller is the cost of debt,
the better it is for the total capital structure.