Problem: Which of the following statements is most correct?
a. A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, the cost of retained earnings is generally lower than the after-tax cost debt financing.
b. The capital structure that minimizes the firm's cost of capital is also the capital structure that maximizes the firm's stock price.
c. The capital structure that minimizes the firm's cost of capital is also the capital structure that maximizes the firm's earnings per share (EPS).
d. If a firm finds that the cost of debt financing is currently less than the cost of equity financing, an increase in its debt ratio will always reduce its cost of capital.
e. Statements a and b are correct.