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Target Capital Structure

 

Target capital structure is a mix of equity and debt capital that maximizes value of the shares. Target capital structure may be achieved when WACC (Weighted Average Capital Cost) is minimal. If proportion of equity is too large, then WACC will be higher (because usually equity cost is higher than debt cost). If proportion of debt too high, it may be not good too, because when company gets too much indebted it increases both debt and equity capital. 

 

There is no exact optimum ratio of debt and equity capital for all companies, because it varies depending on sector, financial environment and other factors. Target capital structure is one of the ways for stockholder wealth maximization

 

 






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