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Optimal capital structure

Capital structure refers to the combination of sources from which the long-term funds required in a business can be obtained, i.e., what should be the proportions of equity capital, preferred equity capital, internal sources, dentures and other sources. of funds in total. amount of capital that a company can raise to establish its business.

It is a framework of different types of financing used by a company to acquire the necessary resources for its operations and growth. Typically, it is made up of shareholder investments (equity) and long-term loans (loan capital), but unlike financial structure, it does not include short-term loans (such as overdrafts) and liabilities (such as trade credit). .

It refers to corporate finance. For example, a company introduced a business in which the owner invested 100 billion and 30 billion was paid back and 70 billion left as bad debt.

The capital structure is said to be an optimal structure when the firm has selected such a combination of equity and debt so that the wealth of the firm is maximum. In this structure, the cost of capital is minimum and the market price per share is maximum.

There are different schools of thought when it comes to capital structuring theories. The net income approach, the net operating income approach, and the traditional approach are the three main methods used to calculate the optimal capital structure.

However, it is difficult to find an optimal combination of debt and equity where this structure would be optimal because it is difficult to measure a drop in the market value of an equity stock due to increased risk due to the high debt content in the capital structure. . .

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