What is an optimum capital structure?
Understand the Problem
The question is asking for the definition and understanding of the concept of optimum capital structure, which refers to the ideal mix of debt, equity, and other financing sources that minimizes the cost of capital and maximizes the value of the firm.
Answer
The best mix of debt and equity financing that maximizes a company's market value while minimizing its cost of capital.
The final answer is the best mix of debt and equity financing that maximizes a company's market value while minimizing its cost of capital.
Answer for screen readers
The final answer is the best mix of debt and equity financing that maximizes a company's market value while minimizing its cost of capital.
More Information
An optimal capital structure typically considers the trade-off between the tax advantages of debt and the financial flexibility offered by equity financing.
Tips
A common mistake is assuming that maximum debt is always optimal; however, excessive debt can increase financial risk and potentially lead to bankruptcy.
Sources
- What Is Optimal Capital Structure? - Investopedia - investopedia.com
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