Question

what is the optimal capital structure for a company and what is the impact it has on corporate value

Answer 1

optimal capital structure of a company is thestructure or proportion of debt and equity at which the weighted average cost of capital is minimum. If the debt component is very high it will lead to high interest cost as here there will be higher  chances of default. Also higher debt means higher cost of equity as equity shareholders will demand more return for taking higher financial risk. But also debt is important in the structure as the debt bring sin interest cost which saves the tax expense of the company. Hence the right mox is important to derive at the lowest wacc.

The lowest wacc will lead to highest corporate value. As the future cash flows will be discounted at lower wacc which will result higher present values of cash flows ultimately resulting in higher corporate value.