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Optimal Capital Structure and Stock Price

Decent Essays
To put it simple way, first we have to understand optimal capital structure is maximizes a firm’s stock price, and the target capital structure is mix of the debt, preferred stock, and common equity the firm wants to have (Eugene and Joel 2009). The capital structure is also showing how a firm use different sources of funds to finances its overall operations and growth the stock price.
Capital structure shows that how a firm’s assets have been established debt and equity, it is very important in a firm, because it is related to the capacity of the company to suit the needs of its stakeholders. The capital structure impacts on the performance of the firm, because it can influence the top management of the company decision making (Hitt, Hoskisson and Harrison, 1991).For example, a company has 20million in equity and 80 million in debt. It can be defined as 20% equity-financed and 80% debt-financed. The ratio of debt to total financing companies, 80% in this example, is called the leverage of the company. In reality, the capital structure may be very complex, including dozens of sources. Gearing ratio is the capital from outside the business by the company adopted, such as taking a short term loan (Capital Structure Overview and Theory 2014).
However, in 1958, Professors Franco Modigliani and Merton Miller was published the most influential finance article. Here after the Modigliani-Miller theorem this was published by Franco Modigliani and Merton Miller, under a limiting set
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