A company's capital structure decisions address the ways a firm's assets are financed-using debt, preferred stock, and common equity capital-and a firm's capital structure is often described using percentages of each type of capital used (e.9. 30% debt, 10% preferred stock, and 60% common equity). As with all finandai decisions, a firm should attempt to implement a capital structure that maximizes its stock price, or shareholder volue. This is called the optimal capital structure. Which of the following statements regarding a firm's optimal capital structure is true? The optimal copital structure minimizes the firm's price-tchearnings ratio. The optimal capital structure maximities the firm's cost of debt. The optimal capital structure maximizes return on equity. The optimal capital structure minimizes the cost of equity. Understanding the impact of debt in the capital structure Suppose you are conducting a workshop on caphal uructure decisions and you want to highteght certain key isswes felated to capital structure. Your asvistant has made a list of points for your session, but he thinks he might have made some mistakes. Review the list and identify which thems are correct. Check all that apply. The pre-tax cost of debt increases as a firms risk of bankruptey increases. An increase in debt financing decreases the risk of bankruptey. Check all that apply. The pre-tax cost of debt increases as a firm's risk of bankruptcy increases. An increase in debt financing decreases the risk of bankruptcy. Risks of bankruptcy increase management's spending on perquisites and increase agency costs. There is a hierarchy of creditors in the event of bankruptey, and bondholders have a claim that is senior to the claims of a firm's preferred and common shareholders. An increase in debt financing beyond a certain point is likely to increase a firm's cost of equity