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.