Question

A firm's capital structure and its target capital structure proportions are important determinants of a firm's weighted average cost of capital. Use an real company to Explain. I recommend you use a listed company like eBay, Facebook or what ever you like to respond this question.

Thanks for any help on this question :)

Answer 1

Capitals structure is defined as proportion of debt and equity in its balance sheet. capital structure concern with only long-term debt and equity in capital. company set target capital structure at which overall cost of capital is minimum. this capital structure is also called optimal capital structure.

Optimal capital structure means a combination of debt and equity in capital structure which gives lowest weighted average cost of capital. The goal of management of company is to minimize the WACC of the company.

WACC is calculated by summation proportional individual cost of capital that is cost of debt capital and cost of equity capital. the goal of target capital structure is to minimize the value of WACC.