What is an optimal capital structure?

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Stock price

Category: Tags: asked June 22, 2012

9 Answers

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Capital structure with a minimum weighted-average cost of capital and thereby maximizes the value of the firm's stock, but it does not maximize earnings per share (Eps). Greater leverage maximizes EPS but also increases risk. Thus, the highest stock price is not reached by maximizing EPS. The optimal capital structure usually involves some debt, but not 100% debt. Ordinarily, some firms cannot identify this optimal point precisely, but they should attempt to find an optimal range for the capital structure. The required rate of return on equity capital (R) can be estimated in various ways, for example, by adding a percentage to the firm's long-term cost of debt. Another method is the Capital Asset Pricing Model (CAPM).

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A "best" debt/equity ratio for a company. Optimal Capital Structure is the debt/equity ratio that will minimize the cost of capital, i.e., the cost of financing the company's operations.

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Investopedia explains Capital StructureA company's proportion of short and long-term debt is considered when analyzing capital structure. When people refer to capital structure they are most likely referring to a firm's debt-to-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is relatively highly levered. http://www.investopedia.com/terms/c/capitalstructure.asp

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In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage. In reality, capital structure may be highly complex and include tens of sources. Gearing Ratio is the proportion of the capital employed of the firm which come from outside of the business finance, e.g. by taking a short term loan etc.

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Cappital structure refers to company's debt/equity ratio. The optimal one is the ratio where the company positioned themselves in balanced ratio.There is no such thing as optimal and it also varies with the industry

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A "best" debt/equity ratio for a company. This is the debt/equity ratio that will minimize the cost of capital, i.e., the cost of financing the company's operations.

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The makeup of the liabilities and stockholders' equity side of the balance sheet, especially the ratio of debt to equity and the mixture of short and long maturities.

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Optimal Capital Structure (OCS) is the financing (getting money) mix that minimized the cost of capital and therefore maximizes the value of the entity that is using the capital (money) to do stuff. OCS also has important implications for personal finances and amateur investors alike.In less formal terms, your family needs money to do stuff. Whether you are going to a movie or buying a house, you have two choices: you can pay cash or finance it via credit card, mortgage or bank loan. Neither choice is inherently bad. The mortgage choice is, in fact, obviously good in most cases.

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Capital Structure refers to how a company finances its operations, the firm's various sources of funds to support its overall operations and growth. Funding sources include a combination of long-term debt, specific short-term debt, common equity, and preferred equity.

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