As a general rule, the capital structure that
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A. B. C. D. E.B
The optimal capital structure is the one that maximizes the price of the firm's stock, and this generally calls for a debt ratio which is lower than the one that maximizes expected EPS.
Let's analyze each statement to determine which one is correct:
A. Minimizes the required rate on equity also maximizes the stock price. This statement is incorrect. The required rate on equity refers to the return expected by equity investors, which is influenced by the riskiness of the investment. While minimizing the required rate on equity may attract more investors, it does not necessarily maximize the stock price. Other factors, such as the company's growth prospects and market conditions, also play a significant role in determining the stock price.
B. Maximizes the price per share of common stock also minimizes the weighted average cost of capital. This statement is generally correct. The weighted average cost of capital (WACC) is the average rate of return a company must earn on its investments to satisfy its investors. It comprises the cost of equity and the cost of debt, weighted according to the company's capital structure. When the price per share of common stock is maximized, it typically indicates that the company is effectively utilizing its resources and generating higher returns. This, in turn, can lead to a lower cost of equity and, consequently, a minimized WACC.
C. Maximizes expected EPS also maximizes the price per share of common stock. This statement is generally correct. Expected earnings per share (EPS) is a measure of a company's profitability. When a company maximizes its expected EPS, it typically indicates strong financial performance and can lead to an increase in the stock price. Higher EPS may attract more investors, which can drive up demand for the company's shares and increase the stock price.
D. None of these are correct. This option implies that none of the statements provided in the question are correct. However, as discussed above, statement B and C are generally correct, so this option is incorrect.
E. Minimizes the interest rate on debt also maximizes the expected EPS. This statement is incorrect. Minimizing the interest rate on debt does not necessarily maximize expected EPS. While reducing interest expenses can improve a company's profitability, maximizing expected EPS depends on various factors such as revenue growth, cost control, and efficient use of resources. The interest rate on debt is only one component among many factors that influence expected EPS.
In conclusion, option B is the most accurate statement among the given options. Maximizing the price per share of common stock generally indicates effective utilization of resources, which can lead to a minimized weighted average cost of capital (WACC).