What is the optimal capital structure?

The company funds its activities using funds from debt and its own capital. The debt applies to the company loans from external sources. The capital itself refers to the money that the owners or shareholders of the company invest in the company. The company's capital structure is its ratio of long -term debt to its own capital. The optimal capital structure for the company is the best debt ratio to capital, minimizing financing costs and maximizing the value of the company. Capital costs usually consist in dividends that the company distributes to its owners or shareholders - dividends that the company could delay or reduce. Debt holders are entitled to the company's financial funds and the company can only pay shareholders after their debt obligations for the period. The debt is cheaper, but brings with it the risk that it will not be possible to make payments in time, which could lead to bankruptcy. Therefore, the company must find an optimal capital structure that minimizes the cost of FINuNoving and minimizes the risk of bankruptcy.

The

capital structure of the company can mathematically found by calculating its minimum weighted average capital costs. For example, if the company uses a debt of 4 percent to obtain 30 percent of its funds and its own capital to 10.5 percent to gain 70 percent of its funds, weighted average cost of the company's capital (0.30 x 4 percent) + (0.70 x 10.5 percent) = 8.55 percent. The formula means that the company can receive minimal weighted average capital costs of 4 percent using debt as the only source of funds, but it would not be an optimal capital structure of the company, because the company would then face a high risk of bankruptcy.

Other factors also contribute to the non -functional nature of the attempt to achieve the optimal capital structure only by debt to finance the company's activities. When and the company increases its debt ratio to capital, believeThe solers usually take care of the company's ability to fulfill their payments. It will then increase the interest rate for the company loans. Shareholders also take care of bankruptcy and insist on gaining a higher return rate. Debt costs and equity would increase, which increases weighted average costs per capital.

If the company knows the costs of its own capital and debt at all possible levels of the debt ratio, it could calculate the point at which the minimum weighted average cost of capital obtains, which is, according to its optimal capital structure. If the company has a lower debt ratio to capital than the optimal level, it would pay too much for its funds and could reduce capital costs by borrowing more money. If it has a higher debt ratio to capital than the optimal level, it would also apply too much for their funds, as creditors and shareholders perceive the company as a jaki -proximate and the company could reduce the cost of capital by paying their debt or issuing new capital.

critics of theory toThe ombromisu disagrees that the optimal capital structure can be found using this method. It is said that in real life shareholders, creditors and managers may not always behave according to theory. There is an asymmetry of information where creditors and shareholders know less than managers who do not have to act in the best interest of the company.