What Are the Best Strategies for Optimal Capital Structure?
The optimal capital structure means that within a certain period of time, the weighted average cost of capital WACC of the capital raised by the enterprise is the lowest to maximize the value of the enterprise. It should be the company's Target Capital Structure.
Optimal capital structure
- Best
- optimal
- Helps maximize the owner's wealth and makes
- Capital structure if not optimal
- At any time, there is only one
- The best point of debt is the best
- Reason for adjustment
- Meaning of capital structure
- Due to the limitation of people's cognitive ability, people's understanding of the best capital structure has not reached the level of complete understanding. Therefore, in real life, how to achieve the optimal capital structure of a company is a difficult problem. This article believes that the optimal capital structure includes two meanings: the first layer refers to the suboptimal capital structure, and the second layer refers to the ideal optimal capital structure. The best capital structure we usually talk about refers to the ideal best capital structure. This article believes that the ideal optimal capital structure is a long-term and continuous pursuit of corporate goals. The ideal optimal capital structure is a specific value, not an interval. However, due to various factors, enterprises cannot reach the ideal optimal capital structure at any time. In addition, due to the limitation of cognitive ability, people have not reached the point of fully understanding the decision basis and value of the optimal capital structure. The ideal capital structure is a capital structure that exists in theory, but is very difficult to achieve in reality.
- Suboptimal capital structure
- Therefore, in real life, enterprises can only choose the optimal capital structure in reality-the suboptimal capital structure. The sub-optimal capital structure refers to the capital structure under the condition that the financial indicators of the enterprise are healthy and the enterprise's sustainable development ability is strong. The suboptimal capital structure is not a specific, fixed value, but a variable interval. We can only influence the capital structure by influencing and manipulating the relevant variables that we can control and control, so that the suboptimal capital structure approaches the ideal optimal capital structure, but due to many factors affecting the optimal capital structure, we cannot understand, or Even if it is understood, it cannot be controlled, which makes it difficult for the actual capital structure to reach the ideal optimal capital structure. Therefore, when the optimal capital structure is approached by affecting the variables we can control, we can consider that a sub-optimal capital structure has been achieved. Under the guidance of this idea, the suboptimal capital structure is an interval containing the ideal optimal capital structure. The gap between the suboptimal capital structure and the optimal capital structure is affected by variables that cannot be controlled by us.
- Choice of suboptimal capital structure
- When an enterprise's financial indicators are within a safe range and then reach the excellent standard, the capital structure of the enterprise is a sub-optimal capital structure. According to the theory of influencing factors of capital structure, the capital structure of an enterprise is affected by various financial indicators of the enterprise. These indicators include solvency indicators, profitability indicators, growth indicators, etc. Obviously, when the various financial indicators of the enterprise are in excellent condition At the same time, they will have a beneficial impact on the capital structure, so that the current capital structure is conducive to the realization of maximum corporate value. Conversely, if certain financial indicators in a company deteriorate, the capital structure is certainly not optimal.
- The capital structure that can promote the sustainable and healthy development of an enterprise may be closer to a suboptimal capital structure. When the capital structure of an enterprise is close to the optimal capital structure, the value of the enterprise is conducive to maximization. Under this condition, the enterprise has strong competitiveness and vitality. Enterprises can not only survive, but also develop well. If the enterprise can continue to develop healthily for a long period of time, it means that the capital structure of the enterprise is suitable for the enterprise, and the capital structure at this time may be a suboptimal capital structure.
- The capital structure of the best companies in the same industry is close to the sub-optimal capital structure. Although the optimal capital structure of different enterprises is different, within the same industry, there are certain similarities between enterprises, so the optimal capital structure is relatively close. The best-show companies in the same industry indicate that their financial indicators are relatively healthy, that the company has a strong ability to sustain development, and that the company is more competitive, which shows that the capital structure of the best-show companies is close to the second best Capital structure. Therefore, the capital structure of the best companies in the same industry can be used as the reference standard for the suboptimal capital structure of the company.