The optimal capital structure for the firm is determined as that capital structure for which the company's WACC is the lowest. The lower the company's WACC, the higher the value of the firm, since the value of any company is the present value of the expected cash flows to the firm discounted at the WACC.Aug 10, 2015 · Many people get confused about the optimal capital structure for a company because they observed that different company holding different capital structure. Capital can be formed by using only ...

The optimal capital structure of a firm is often defined as the proportion of debt and equity that results in the lowest weighted average cost of capital (WACC WACC WACC is a firm’s Weighted Average Cost of Capital and represents its blended cost of capital including equity and debt. The WACC formula is = (E/V x Re) + ((D/V x Rd) x (1-T)). Capital Structure BUSI 7110/7116 -Yost Optimal Capital Structure (with taxes and bankruptcy costs) Trade-Off Theory of Capital Structure: The firm borrow up to the point where the tax benefits from an extra dollar of debt is exactly equal to the cost that comes from the increased probability of financial distress. Optimal Capital Structure