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.

RELATED TERMS
  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. Capital Structure

    A mix of a company's long-term debt, specific short-term debt, ...
  4. Leveraged Loan

    Loans extended to companies or individuals that already have ...
  5. Recapitalization

    Restructuring a company's debt and equity mixture, most often ...
  6. Tight Monetary Policy

    A course of action undertaken by the Federal Reserve to constrict ...
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

    3 Healthy Financial Habits for 2016

    ”Winning” investors don't just set it and forget it. They consistently take steps to adapt their investment plan in the face of changing markets.
  4. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  5. Economics

    The Truth about Productivity

    Why has labor market productivity slowed sharply around the world in recent years? One of the greatest economic mysteries out there.
  6. Term

    How Market Segments Work

    A market segment is a group of people who share similar qualities.
  7. Active Trading

    Market Efficiency Basics

    Market efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time.
  8. Fundamental Analysis

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
  9. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  10. Economics

    The Basics Of Business Forecasting

    Whether business forecasts pertain to finances, growth, or raw materials, it’s important to remember that a forecast is little more than an informed guess.
RELATED FAQS
  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 finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  5. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Full Answer >>
  6. 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 >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center