Question

A firm sets a target capital structure to use when raising new funds in an effort to: a. maximize the dividend per share it pays commons stockholders. b. minimize its cost of equity (rs). c. minimize its weighted average cost of capital (WACC). d. maximize its earnings per share (EPS). e. minimize its cost of debt (rd).

Answer 1

Answer:

C) minimize its weighted average cost of capital (WACC).

Explanation:

The weighted average cost of capital (WACC) is determined by multiplying the different costs of capital by their relative weight (proportional to the company's total capital structure). You must include all the sources of capital in order to calculate the WACC, e.g. common stock, bonds, bank loans, preferred stock and other long term debts.

The lower the WACC, the lower the discount rate for the company's cash flows.