CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

Which of the following statements is most correct?

I. The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.
II. As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS.
III. The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price.
IV. The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC.
A. All of these statements are false
B. I and II
C. IV only
Explanation: The optimal capital structure is the one that maximizes the price of the firm's stock, and minimizes the firm's WACC.

User Contributed Comments 8

User Comment
danlan Not maximize EPS but maximize stock price!
danlan Minimize WACC and not cost of debt and cost of equity.
dskim116 trick but good question!
jackwez def a good question...
kwanlo3 yea, to minimize the WACC, i love it
touchou when eps goes up, what happen to stock price? i beleive it goes up too.
Nando1 Can anyone clarify why maximizing EPS won't maximize share price?
TarriqP You can increase EPS by reducing number of shares. A decision to lean more towards D then E can increase earnings PER SHARE without increasing total earnings or firm value.
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