Busıness Fınance Iı Deneme Sınavı Sorusu #1013240
How do you determine the optimal capital structure?
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Capital structure suggests that agency problems may arise if managers (agents) pursue different objectives other than those of the shareholders (principals). |
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An Appropriate Capital Structure is that capital structure at that level of debt – net income proportion. |
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The capital structure is how a firm finances its overall operations and growth by using different sources of funds. |
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A company raises new capital, it will focus on maintaining this target or optimal capital structure. |
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The optimal capital structure is estimated by calculating the mix of debt and equity and free cash flows are capitalized at the calculated WACC to determine the firm value. |
Mixing debt and equity in building up the capital structure of the firm is essential for value maximization. Estimating the optimal capital structure requires a careful analysis with repetitions. The managers normally start with a trial capital structure and evaluate shareholders’ wealth. They continue the same practice until they identify a capital structure maximizing the firm value. At each trial, the cost of debt and equity are projected in order to quantify the WACC. Then the forecasted free cash flows are capitalized at the calculated WACC to determine the firm value. As a final step, debt is deducted from the value of the firm to measure the value of the equity and the stock price.
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