What happens to the intrinsic value of a stock under an optimal capital structure?

The intrinsic value of a stock reflects the true worth of a company's shares based on fundamentals, including factors like earnings, dividends, and growth potential. When a company achieves an optimal capital structure, it is balancing its debt and equity to minimize its cost of capital. This balance enables the firm to maximize its overall value, subsequently increasing the intrinsic value of its stock.

An optimal capital structure typically consists of the right mix of debt and equity. By utilizing debt effectively, a company can take advantage of tax benefits associated with interest payments, which can enhance profitability. Additionally, a well-structured capital framework can foster a stable financial position, mitigate risks associated with equity dilution, and lead to more predictable earnings. As a result, the company's stock shares become more appealing to investors, thereby driving up their intrinsic value.

Ultimately, an optimal capital structure allows a firm to operate more efficiently, potentially boosting future cash flows and returns on investments. This increase in expected future performance translates to a higher intrinsic value for the company's stock, reinforcing the rationale behind the answer provided.