Asked by Emerson Bernheiser on Jun 29, 2024
Verified
The financial management goal as it pertains to the capital structure of a firm is to operate at the point where the debt-equity mix:
A) Creates the largest tax shield for the firm.
B) Maximizes the financial distress costs.
C) Maximizes the value of the firm.
D) Minimizes the potential bankruptcy costs.
E) Minimizes the yield-to-maturity on debt.
Capital Structure
The mixture of debt and equity that a company uses to finance its operations and growth.
Tax Shield
The reduction in income taxes that result from taking a deductible expense, such as mortgage interest, which reduces taxable income.
Financial Distress Costs
Expenses that a company faces when it is having difficulty meeting its financial obligations, which can include legal, restructuring, and operational costs.
- Master the idea of capital structure and its significance in shaping a company's financial valuation.
- Recognize the role of taxes, bankruptcy costs, and financial distress in shaping capital structure decisions.
Verified Answer
NM
Nora-Paige McFaddenJul 06, 2024
Final Answer :
C
Explanation :
The primary goal of financial management regarding capital structure is to maximize the value of the firm. This involves finding the optimal mix of debt and equity financing that minimizes the overall cost of capital and thereby maximizes firm value.
Learning Objectives
- Master the idea of capital structure and its significance in shaping a company's financial valuation.
- Recognize the role of taxes, bankruptcy costs, and financial distress in shaping capital structure decisions.