September 19, 2019

What is an optimal capital structure?

  • Best debt to equity ratio for a firm that maximises its value.
  • Optimal capital structure is one that offers a balance between the ideal debt-to-equity range and minimises the firm’s cost of capital.
  • In theory debt financing generally offers the lowest cost of capital due to its tax deductibility, however it is rarely the optimal structure since a company’s risk generally increases as debt increases. 

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