When Choosing a Capital Structure, the Objective of the Firm

question 228

Multiple Choice

When choosing a capital structure, the objective of the firm should be to:

• A) Choose the one that maximizes the current value of the firm's bonds.
• B) Choose the one that minimizes the value of the firm.
• C) Choose the one that minimizes the firm's WACC.
• D) Choose the one that results in the largest interest tax shield.
• E) Choose any capital structure since it is always irrelevant.

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Definitions:

Fixed Dividend

A dividend that is set at a particular amount and does not vary, often found in preferred stocks.

Dividend Yield

A financial ratio that shows how much a company pays out in dividends each year relative to its share price.

Cost of Equity

The rate of return that a company is required to pay out to its equity investors, reflecting the compensation for the risk they undertake.