Understanding Optimum Capital Structure in Financial Management

Capital structure refers to the mix of long-term financing sources a company utilizes, such as equity, debt, and reserves. By determining the ideal proportion of internal and external funding, a company can impact its Weighted Average Cost of Capital (WACC) and firm value. The optimal capital structure aims to maximize shareholder wealth while minimizing capital costs, enhancing investment opportunities. Factors like simplicity, risk management, liquidity, flexibility, cost efficiency, and returns on equity capital play key roles in determining an ideal capital structure.

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