Optimal Capital Structure

Optimal capital structure refers to the ideal mix of debt and equity financing that minimizes a company's cost of capital while maximizing its value. A company’s capital structure consists of the proportion of debt, equity, and other financial instruments used to fund its operations and growth. The optimal capital structure strikes a balance between the tax advantages of debt (such as interest tax shields) and the financial risk associated with higher debt levels.

Example

A company uses a mix of 60% equity and 40% debt to achieve its optimal capital structure, taking advantage of tax benefits while maintaining a manageable level of financial risk.