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Explain what an optimal capital structure consists of.

Explain what an optimal capital structure consists of.
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An optimal capital structure refers to a perfect mix of debt and equity which helps in attaining a minimum cost of capital for the firm and in turn maximizing the value of the firm (maximizing shareholders' wealth). As per few theories, including more debt in the capital structure helps in reducing the WACC due to tax deductabillity of debt. However, including too much debt increases the levels of financial risk for the firm. Thus, firms must find the optimal level at which the marginal cost of raising debt is equal to the marginal benefit of debt.

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