Question

A capital structure which minimise cost of a capital and maximises eps is an optimum capital structure

Answer 1

Capital structure refers to how a firm manages to finance its overall operations and expansion by using diverse sources of fund. Companies raise funds through bonds, shares etc. The company’s debt-to-equity ratio determines how risky it is to invest in a company. Some of the factors to keep in mind while investing in a company are:
· Business Risk : Every business has a certain amount of risk but the level of risk determines the level of debt. Higher the risk, lower the ideal is the debt ratio.
· Financial Flexibility: The amount of finance the company is able to raise during its low time determines how good a company’s goodwill is. However, if a company is able to manage its low time without raising external capital there by reducing its debt is also a key feature.
· Growth Rate : Firms usually borrow cash to fund their projects during the peak of their growth there by increasing their debt. However, a stable growth is what an investor needs to look for as they will have less debt.
· Management : A more aggressive management means higher risk ratio while a more calm management assure a secured return on investment.