CAPITAL STRUCTURE  Capital structure is the mix of the long-term sources of funds used by a firm. It is made up of debt and equity securities and refers to permanent financing of a firm. It is composed of long-term debt, preference share capital and shareholders’ funds.

What is the optimal capital structure?

Key Takeaways. An optimal capital structure is the best mix of debt and equity financing that maximizes a company’s market value while minimizing its cost of capital. Minimizing the weighted average cost of capital (WACC) is one way to optimize for the lowest cost mix of financing.

The goal of the capital structure decision is to determine the financial leverage that maximizes the value of the company (or minimizes the weighted average cost of capital). In the Modigliani and Miller theory developed without taxes, capital structure is irrelevant and has no effect on company value.

What is capital structure What are the internal and external factors influencing capital structure?

Answer: Capital Structure & Internal and External influencing Capital Structure. Capital Structure constitutes two words i.e. Capital and Structure. The word ‘capital’ refers to the investment of funds in business while ‘structure’ means arrangement of different components in proper proportion.

What are the important features of capital structure?

Article shared by : ADVERTISEMENTS: Some of the major features of sound capital structure are as follows: (i) Maximum Return (ii) Less Risky (iii) Safety (iv) Flexibility (v) Economy (vi) Capacity (vii) Control.

What is the relationship between WACC and the value of the firm?

(a) The relationship between the WACC and the value of the firm is, if the WACC is minimized then the firm value will be maximized. The weighted average cost of capital is the appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm.

Which is an example of a capital structure decision?

The airline industry is extremely price competitive, as well as having huge fixed costs and very low variable costs. This is an example of: The capital structure decision attempts to minimize ____ which maximizes the value of the firm. In considering a firm’s capital structure, the firm should increase its ____ which will maximize its value.

Why is optimization of capital structure an important decision?

The prime objective while deciding about the optimal capital structure of a firm is to maximize the value of the company. The business firm, while raising funds for financing its investment proposals, has to make a choice from amongst different sources in different proportions. These can be the following:

How does business risk affect a capital structure?

Generally the ____ a firm’s business risk, the ____ the amount of financial leverage that will be used in the optimal capital structure. The use of fixed cost sources of funds, such as debt and preferred stock affect a firm’s ____.

Why is net operating income irrelevant to capital structure decision?

Net Operating Income Approach Capital structure decision is irrelevant. If you raise debt, the cost of equity will increase. The overall cost of capital will remain constant in spite of leverage. Thus there is no advantage of raising debt. As we raise the debt, the cost of equity increases in the same proportion.