Optimal Capital Structure
- Optimal Capital Structure
- The best debt-to-equity ratio for a firm that maximizes its value. The optimal capital structure for a company is one which offers a balance between the ideal debt-to-equity range and minimizes 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.
A company's ratio of short and long-term debt should also be considered when examining its capital structure. Capital structure is most often referred to as a firm's debt-to-equity ratio, which provides insight into how risky a company is for potential investors. Determining an optimal capital is a chief requirement of any firm’s corporate finance department.
Investment dictionary.
Academic.
2012.
Look at other dictionaries:
Capital structure — Gearing ratio redirects here. For the mechanical concept, see gear ratio. Finance Financial markets … Wikipedia
Traditional Theory Of Capital Structure — The theory that when the Weighted Average Cost of Capital (WACC) is minimized, and the market value of assets are maximized, an optimal structure of capital exists. The Traditional Theory of Capital Structure says that a firm s value increases to … Investment dictionary
Trade-off theory of capital structure — The trade off theory of capital structure refers to the idea that a company chooses how much debt finance and how much equity finance to use by balancing the costs and benefits. The classical version of the hypothesis goes back to Kraus and… … Wikipedia
Capital market imperfections view — The view that issuing debt is generally valuable but that the firm s optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net corporate/personal tax, agency cost, bankruptcy cost, and… … Financial and business terms
capital market imperfections view — The view that issuing ( issue) debt is generally valuable, but that the firm s optimal choice of capital structure involves various other views of capital structure ( net corporate/personal tax, agency cost, bankruptcy cost, and pecking order),… … Financial and business terms
STRUCTURE ET FONCTION — L’étude de la relation entre les structures et les fonctions est au cœur même de la biologie. Cette relation s’exprime chez les êtres vivants par l’adaptation des premières aux secondes et pose une série de problèmes absolument fondamentaux,… … Encyclopédie Universelle
Risk adjusted return on capital — (RAROC) is a risk based profitability measurement framework for analysing risk adjusted financial performance and providing a consistent view of profitability across businesses. The concept was developed by Bankers Trust in the late 1970s. Note,… … Wikipedia
Cost of capital — The cost of capital is a term used in the field of financial investment to refer to the cost of a company s funds (both debt and equity), or, from an investor s point of view the shareholder s required return on a portfolio of all the company s… … Wikipedia
Positive psychological capital — is defined as the positive and developmental state of an individual as characterized by high Self Efficacy, Optimism, Hope and Resiliency. [• Luthans F., Youssef, C.M. (2004). Human, social, and now positive psychological capital management:… … Wikipedia
Modigliani-Miller theorem — The Modigliani Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for modern thinking on capital structure. The basic theorem states that, in the absence of taxes, bankruptcy costs, and asymmetric information, and in an… … Wikipedia
