Discuss the concept of an optimal capital structure

Optimal Capital Structure -

Optimal capital structure is a theory which tells about the mixture of debt and equity of an entity. According to this theory if a company takes debt its value will increase only up to a point and it reduces beyond this particular point .

High debt indicates higher risk to the entity and when the entity does not repay the debt it will lead to decline in its market image.

The basic objective of optimal capital structure is that the company should be able to generate best earnings and final net income to share holders . Debt gives us tax deduction and debt is of low cost when compared to equity hence up to some point debt is good and generates more residual earning sto equityh share holders . Higher debt will lead to reduction of residual earnings.

Optimal Startucture is a point where the company is able to generate highest earnings per share for share holders with a given amount of earnings before interest and taxes.

Optimal capital structure runs around Earnings before interest and txaes and earnings attributable to equity share holders