Determine optimal capital structure

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Reference no: EM133736253

Question: How would a financial manager determine optimal capital structure? How would it fit in with the company's capital expenditures, growth plans and operating results?

Determining an optimal capital structure involves balancing debt and equity to minimize the company's cost of capital while maximizing shareholder value. A financial manager typically uses several approaches, including the trade-off theory, which balances the tax advantages of debt with the costs of potential financial distress, and the pecking order theory, which suggests firms prefer internal financing first, then debt, and issue equity as a last resort (Brigham & & Ehrhardt 2020).

In aligning this optimal capital structure with the company's capital expenditures, growth plans, and operating results, a financial manager must ensure that the chosen structure supports sufficient liquidity and flexibility. Capital expenditures should be financed in a way that does not strain the company's financial health, considering future growth prospects and operating cash flows. A balanced capital structure enables the firm to seize growth opportunities and maintain competitive advantage while managing risk and ensuring stable operating results (Tuovila 2024)

Reference no: EM133736253

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