Optimum Capital Structure

OPTIMUM CAPITAL STRUCTURE

Optimum Capital Structure is the capital structure at which the weighted average cost of capital is maximum and the value of the firm is maximum. An optimum capital structure may be defined as the capital structure or combination of debt and equity that leads to the maximum value of the firm.

FEATURES OF OPTIMUM CAPITAL STRUCTURE

01. Profitability

An optimum capital structure should minimize the cost of financing and maximizes the earnings per equity share. It should increase the profitability of the firm and its shareholders also.

02. Flexibility

The capital structure should be flexible that the company can raise funds whenever needed. The flexible capital composition of the firm results in many advantages to the firm at the time of raising additional funds for its various expansion and diversification policies.

03. Solvency

The capital structure should be solvent so that the firm does not maintain the risk of becoming insolvent. An optimal Capital structure gives an assurance that the firm can maintain its solvency and can give a reason for shareholders to trust the firm.

04. Control

There should be a minimum risk of loss or dilution of control over the company. If the capital structure consists of more equity there is a problem of creeping acquisition and different types of acquisition techniques which result in dilution of the promoters control in the firm.

 

weighted average cost of capital

Weighted Average Cost of Capital (WACC)

capital structure

Capital Structure – Objectives, Forms and Theories