with illustration

1. Financial Management (KMB 204)
Optimum Capital Structure
Prepared by :
Taru Maheshwari
Sr.Asstt.Prof. ABESEC
AKTU (Lucknow)

2. Optimal Capital structure
• Mix of debt and equity which minimize cost of
capital and maximize Value of firm
• Minimization of Risk
• Maximization of return
• Preservation of Control
• Balanced Leverage
• Minimum Fixed Cost burden
• Economic
• Flexibility

3. Illustration
Debt a s% of total capital Cost of Debt Cost of equity
0 7 15
10 7 15
20 7 15.5
30 7.5 16
40 8 17
50 8.5 19
60 9.5 20

4. Solution
Debt a s% of total capital Cost of Debt Cost of equity Composite cost of capital
0 7 15 (7x0) + (15x1) =15
10 7 15 (7x.1) + (15x.9) =14.20
20 7 15.5 (7x0.2) + (15.5x.8) =13.80
30 7.5 16 (7.5x.3) + (16x.7) =13.45
40 8 17 (8x.4) + (17x.6) =13.40
50 8.5 19 (8.5x0.5) + (19x.5) =13.75
60 9.5 20 (9.5x0.6) + (20x.4) =13.70