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Optimum capital structure is the capital structure at which the Weighted Average Cost of Capital (WACC) is minimums and thereby the value of the firm is maximums. Deciding the suitable capital structure is important decision of the financial management
optimum capital structure • The capital structure or composition of debt & equity that leads to maximum value of firm, max. wealth of share holders & minimizing the cost of capital.
Practical message: “If there is an optimal capital structure, it should reflect taxes and/or specific market imperfections.” [Myers 1993] ⇓ ⇓. leads.
Optimal Capital Structure. Prof H. Pirotte. Why not 100% debt? Increasing debt increasing risk and increasing likelihood of distress, which has costs associated with it – e.g., Costs of potential bankruptcy. The desire to understand what could be behind the idea of costs of financial distress has led academicians to study other impacts like: 2.
Capital structure is understood as the relationship between equity and debt capital of the company. Does capital structure affect the company’s main settings, such as the cost of capital, profit, value of the company, and the others, and, if it affects, how? Choice of an optimal capital structure, i.e., a capital structure, which minimizes the
The optimal capital structure should ensure companies retain sufficient capital levels during both good times and bad. Many companies are challenged to create a structure that will be workable through multiple business cycles.
The authors provide a reasonably user-friendly model for arriving at a company’s optimal capital structure based on the estimation of the effective cost of capital and the determination of the shares of new equity capital and long-term debt capital that will both minimize the overall cost of capital and maximize its value.
