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Wealth maximization is the main objective of financial management activities. Finance manager takes step to select a capital structure or mix of finance which maximizes shareholders wealth. For optimum capital structure designing finance manager is required to choose a mix of sources of finance so overall cost of capital should be minimum.

What is capital structure?

It refers to mix of sources by which long term funds may be raised which are required in a business. These sources may be equity share capital, internal sources, debentures, preference share capital and other sources of funds in the total amount of capital.

For capital structure planning, following issues should be kept in mind.

1. Capital structure depends on the number of factors. Some of these factors are nature of industry, gestation period, quantum of return on investment and others. So different types of capital structure is required for different types of business undertaking.

2. Planning a capital structure is more important for government policy. For example monetary and fiscal policies of the government affect decisions of capital structure.

Optimum Capital Structure

A capital structure is called optimum capital structure if wealth of firm is maximum. For the optimum capital structure the cost of capital is minimum and market price per share is maximum. For such results a finance manager is required to select such a combination of equity and debt for maximization wealth.

Related Topics: Capital Structure, Optimum Capital Structure, Capital Structure Planning, Risk, Cost of Capital, Taxation, Measurement of Cost of Capital, Weighted average Cost of Capital, Marginal Cost of Capital.

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