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Asked a question 2 years ago

What do you mean by optimum capital structure?

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Optimal capital structure refers to a financial measurement that firms use to determine the best mix of debt and equity to maximize the wealth of firm. The structure is typically expressed as a debt-to-equity ratio. In this, the main aim is to maximize the value of the firm by lowering the capital cost. 

Optimal capital structure is simple structure & easy to understand. One needs not to have in-depth knowledge to understand it. This structure makes the firm less dependent on creditors/investors. In optimum capital structure, debt-to-equity ratio is maintained so that the debt will be a reasonable proportion of the total capital employed in the business. 

It is a mixture of equity and debt which helps in maximizing the wealth of the firm. Optimum capital structure maximizes the price of the stock and minimizes the cost of capital. It gives best earning per share to the share holders and in the long run it also gives them the maximum market price. It is beneficial to the shareholders. As it is maximizing earning per share and minimizing cost ,it is profitable to the firm. It is flexible as firm one can raise funds as and when required. Debt-equity mixture shows the balance between owned capital and debt capital. Optimum capital structure increases value of the firm. Capital structure helps in minimizing risk control the loss of the firm.