Traditional Theory Of Capital Structure

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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.

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