Traditional Theory Of Capital Structure


DEFINITION of 'Traditional Theory Of Capital Structure'

The theory that when the Weighted Average Cost of Capital (WACC) is minimized, and the market value of assets are maximized, an optimal structure of capital exists. The Traditional Theory of Capital Structure says that a firm's value increases to a certain level of debt capital, after which it tends to remain constant and eventually begins to decrease.

BREAKING DOWN 'Traditional Theory Of Capital Structure'

The Traditional Theory of Capital structure tells us that wealth is not just created through investments in assets that yield postive return on investment; purchasing those assets with an optimal blend of equity and debt is just as important.

  1. Weighted Average Cost Of Capital ...

    Weighted average cost of capital (WACC) is a calculation of a ...
  2. Financial Structure

    The specific mixture of long–term debt and equity that a company ...
  3. Leveraged Loan

    Loans extended to companies or individuals that already have ...
  4. Capital Structure

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

    Restructuring a company's debt and equity mixture, most often ...
  6. Rule Of 72

    A shortcut to estimate the number of years required to double ...
Related Articles
  1. Fundamental Analysis

    Using Enterprise Value To Compare Companies

    Learn how enterprise value can help investors compare companies with different capital structures.
  2. Bonds & Fixed Income

    Evaluating A Company's Capital Structure

    Learn to use the composition of debt and equity to evaluate balance sheet strength.
  3. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  4. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  5. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  6. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  7. Entrepreneurship

    Identifying And Managing Business Risks

    There are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
  8. Forex Education

    Explaining Uncovered Interest Rate Parity

    Uncovered interest rate parity is when the difference in interest rates between two nations is equal to the expected change in exchange rates.
  9. Fundamental Analysis

    Using Decision Trees In Finance

    A decision tree provides a comprehensive framework to review the alternative scenarios and consequences a decision may lead to.
  10. Economics

    Understanding Tragedy of the Commons

    The tragedy of the commons describes an economic problem in which individuals try to reap the greatest benefits from a given resource.
  1. What is capital structure theory?

    In financial management, capital structure theory refers to a systematic approach to financing business activities through ... Read Full Answer >>
  2. What does a Chief Financial Officer (CFO) do?

    I f you asked any company's CFO this question, you would probably be in for a three-hour conversation. But the core duties ... Read Full Answer >>
  3. What is fair capital?

    So-called "fair capital," like beauty, is in the eye of the beholder. In financial reporting, there are two kinds of capital: ... Read Full Answer >>
  4. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  5. How can I use a regression to see the correlation between prices and interest rates?

    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
  6. How do I calculate a modified duration using Matlab?

    The modified duration gauges the sensitivity of the fixed income securities to changes in interest rates. To calculate the ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  4. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  5. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  6. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
Trading Center