123 School Work

Discussion of Optimal Capital Structure

• This is a preview of the essay.
  To view the full text you must login!
  
  
  Discussion about Optimal Capital Structure
  
  Shareholders want managers to choose the mix of securities that maximises company value. But does this optimal capital structure exist?
  
  
  
  I. Introduction
  
  With the high development of global economy, corporations have more financing methods, and 'the capital structures of corporations and debt-equity relationships, in particular, have received a lot of attention in both theoretical and practical research'. (Firth M.: 167) Capital structure, which means the composition of a company's long-term financing and is broadly made up of the amount of equity and debt, affects free cash flows, WACC (Weighted Average Cost of Capital), and stock prices, leading managers to think much of it. Shareholders want managers to choose the mix of securities that maximizes the company value, while in practice the optimal capital structure cannot be estimated with precision. 'Many factors influence the capital structure decision, thus even firms in the same industry often have different capital structures.'(Brigham E F&P R Daves: 484) This essay will start with financial theories and then move on to the practical considerations to illustrate the opinion that the optimal capital structure, which is the one that minimizes the WACC and maximizes the price of the firm's stock, does not exist in practice although each firm seems to have a theoretical one.
  
  II...