Business Studies · Financial Management
Which of the following statements concerning the traditional theory of capital structure is correct?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The cost of debt of a company remains completely constant even as its capital gearing reaches very high levels.
- 2The cost of equity of a company decreases continuously as its capital gearing increases.
- 3Buying and selling of shares by arbitrageurs ensures that share prices are consistent with the theory.
- 4There is an optimal capital structure for a company where its overall cost of capital is minimised and market value is maximised.✓
Correct answer
There is an optimal capital structure for a company where its overall cost of capital is minimised and market value is maximised.
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