FREE online courses on Capital Structure of Firms - Capital Structure
The capital structure of a firm identifies the mixture of
different form of capitals it uses to raise money for its projects. In other
words, what percentages of the funds come from debt, preferred stocks, and
common equity? Why does a firm need to know its optimal capital structure? That
is because the goal of a financial manager is to maximize the value of the firm
(on behalf of the shareholders). The financial manager can achieve this with
the help of the proper mixture of debt and equity financing.
We will focus on the concept of achieving the optimal
capital structure for a firm. However, before we proceed we need to revisit
some aspects of the risk a firm encounters to understand what influences its
capital structure.