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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.
2. Which of the following statements is CORRECT?
a. A firm can use retained earnings without paying a flotation cost.
Therefore, while the cost of retained earnings is not zero, its cost is
generally lower than the after-tax cost of debt.
b. The capital structure that minimizes a firm’s weighted average cost of
capital is also the capital structure that maximizes its stock price.
c. The capital structure that minimizes the firm’s weighted average cost
of capital is also the capital structure that maximizes its earnings per
share.
d. If a firm finds that the cost of debt is less than the cost of equity,
increasing its debt ratio must reduce its WACC.