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If a company's existing capital structure is not optimum, should the company take on more debt,...

If a company's existing capital structure is not optimum, should the company take on more debt, repurchase stock, have a seasoned equity offering? why or why not?

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Answer #1

If existing capital structure is not optimum then it could either taken on more debt, repurchase stock or can have seasoned equity offering.
The existing capital structure should be such that that optimum WACC.
WACC = Cost of Equity* Weight of Equity + Cost of Debt*(1-Tax rate)* Weight of Debt
If Company has less debt ratio it can increase debt ratio to reduce WACC.
If Company has higher equity and it has high cash amount then instead of dividend payout it can buy back shares and reduce WACC.
If company is highly leveraged and needs higher cash then it can go for seasoned equity offering.
Seasoned Equity offering means when an existing public company issues more shares.

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