- CFA Exams
- CFA Level I Exam
- Study Session 7. Corporate Finance (1)
- Reading 20. Capital Structure
- Subject 1. Capital structure irrelevance theory

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**CFA Practice Question**

Which of the following statements is most correct?

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.

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.

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**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. |