Optimal Capital Structure


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.


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BREAKING DOWN '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.

  1. Debt/Equity Ratio

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  2. Financial Structure

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  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This ...
  4. Capital Structure

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

    In financial theory, the return that stockholders require for ...
  6. Employee Stock Option - ESO

    A stock option granted to specified employees of a company. ESOs ...
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