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The selection of the optimal capital structure

What are the main factors which determine the selection of the optimal capital structure? Why and how will investors benefit from capital restructuring? Please Explain the two adequately.

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What are the main factors which determine the selection of the optimal capital structure? Why and how will investors benefit from capital restructuring? Please Explain the two adequately
Response:
Capital structure of the firm is the mix of different sources from where the long term funds required for business may be raised. The capital structure is said to be optimal when the firm has selected such a combination of equity and debt so that the wealth of the firm is maximized. Following are the main factors which determine the selection of the optimal capital structure:-
1. Financial risk:-
Financial risk is of two type; risk of cash insolvency and risk of variation in expected earnings available to equity share holder. Risk of cash insolvency is due to higher proportion of debt in capital structure. It increases company's fixed charges i.e. interest irrespective of fact whether it ...

Solution Summary

The main factors which determine the selection of the optimal capital structure and why and how investors will get benefit of capital restructuring is explained in detail in the solution

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