What are the best strategies for optimal capital structure?
The optimal capital structure is an ideal balance between the amount of debt and its own capital, which the company issues to finance its operations. The aim of the good strategy of the capital structure structure is to maintain the amount of the debt as low as possible and at the same time increase the wealth of shareholders by the maximum possible amount. If the company formulates and performs a strategy, it should consider its risks, expected income, managerial style and possible fluctuations in their income and tax rate.
In order to finance growth, companies need cash influx. Since capital projects usually require a large leading investment, companies must raise funds through an optimal capital structure that may include debt, capital or both. The debt is usually issued in the form of bonds, while its own capital is issued in the form of preferred and ordinary shares. The main disadvantage of issuing a large amount of debt is that it will reduce the company's rating and is that it seems to be a higher investment risk.
The second disadvantage primarily relies on the debt to finance capital projects is that it is expensive. The debt usually carries fixed costs, which means that the costs do not roll by market conditions, sale or success or failure of the capital project. The value of the bond issued must be returned to investors at a certain time, which makes it less than the optimal strategy of the capital structure. Some debt issuing is acceptable, but if the company can never repay its fixed costs, it can be forced to be input.
own capital in the form of preferred and ordinary shares is an important part of the optimal strategy of the capital structure. Unlike debt, the costs associated with issuing their own capital are variable because they directly respond to market volatility. Capital itself helps the company to use the balance between risks involved in the capital project and return that owners and managers ExSPEct for admission. After the release of your ownThe company will receive a value for shares based on an initial public offer and gives investors partial ownership in the company.
If the capital project does not fulfill the expected return rate, the company must pay off the market value of shares if the investor decides to sell his shares. This market value may be higher or lower than the value received for the initial public offer. Dividends or profits can be paid to shareholders or can retain the company for other projects.
optimal capital structure usually includes both debt, ordinary shares and preferred shares. The strategy will vary depending on the required return and overall goal of the company. Any strategy of the capital structure structure must maximize the return on minimizing risk. It should also try to maintain capital costs for the lowest possible value.