Optimal Capital Structure

AAA

DEFINITION of 'Optimal Capital Structure'

The best debt-to-equity ratio for a firm that maximizes its value. The optimal capital structure for a company is one which offers a balance between the ideal debt-to-equity range and minimizes the firm's cost of capital. In theory, debt financing generally offers the lowest cost of capital due to its tax deductibility. However, it is rarely the optimal structure since a company's risk generally increases as debt increases.

INVESTOPEDIA EXPLAINS 'Optimal Capital Structure'

A company's ratio of short and long-term debt should also be considered when examining its capital structure. Capital structure is most often referred to as a firm's debt-to-equity ratio, which provides insight into how risky a company is for potential investors. Determining an optimal capital is a chief requirement of any firm's corporate finance department.

RELATED TERMS
  1. Financial Structure

    The specific mixture of long–term debt and equity that a company ...
  2. Cost Of Equity

    In financial theory, the return that stockholders require for ...
  3. Debt/Equity Ratio

    A measure of a company's financial leverage calculated by dividing ...
  4. Capital Structure

    A mix of a company's long-term debt, specific short-term debt, ...
  5. Cost Of Debt

    The effective rate that a company pays on its current debt. This ...
  6. Adverse Domination

    A legal doctrine that allows regulators to bring litigation against ...
Related Articles
  1. Using Enterprise Value To Compare Companies
    Fundamental Analysis

    Using Enterprise Value To Compare Companies

  2. Evaluating A Company's Capital Structure
    Bonds & Fixed Income

    Evaluating A Company's Capital Structure

  3. Investors Need A Good WACC
    Bonds & Fixed Income

    Investors Need A Good WACC

  4. Capital Structure
    Investing

    Capital Structure

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center