What Is the Relationship Between Capital Structure and Cost of Capital?

Capital structure refers to the value composition of various types of capital of an enterprise and its proportional relationship. It is the result of an enterprise's fundraising portfolio in a certain period. The broader capital structure refers to the composition of an enterprise's total capital and its proportional relationship. The capital of an enterprise in a certain period of time can be divided into debt capital and equity capital, as well as short-term capital and long-term capital. The narrow capital structure refers to the composition and proportional relationship of various long-term capital of an enterprise, especially the composition and proportional relationship between long-term debt capital and (long-term) equity capital. The optimal capital structure is the capital structure that maximizes the wealth of shareholders or the largest share price, even if the company has the smallest capital cost.

Capital Structure

Capital Structure

1. Capital structure refers to

Capital, in the economic sense, refers to the basics used for production

The capital structure can be understood from different angles, so various types of capital structures are formed, mainly including the attribute structure of capital and the capital's structure.

The book value structure of capital is

1.Enterprise

Shareholders' equity ratio:

The shareholder equity ratio is the

The judgment criteria of capital structure are:

1. Conducive to maximizing owner's wealth, can make

Capital structure is divided into liabilities and

1,

First, maintaining a reasonable capital structure is conducive to increasing corporate value. Debt financing can bring financial leverage income and tax-saving benefits to enterprises. When the pre-interest tax rate of total assets is greater than the cost of debt, debt financing can obtain financial leverage income and increase corporate value; debt financing can bring To save tax revenue and increase corporate value. However, with the growth of debt financing, the financial risks faced by enterprises will increase, which in turn will lead to financial crisis and bankruptcy.

The second is to influence the value of the enterprise by influencing investors' judgments on the company's operating conditions and investment decisions. The capital structure transmits information about the value of the enterprise to external investors and influences external investment decisions, which in turn affects the value of the enterprise. Repurchases are seen by investors as a sign of a good business outlook because managers take risks.

The third is to affect corporate value by influencing corporate governance structure; debt financing can motivate corporate operators to work hard, choose correct behaviors, and transmit corporate operating performance signals to the market, helping external investors make correct judgments about the future operating status of the enterprise .