Financial Manager
How would a financial manager determine optimal capital structure? How would it fit in with the company’s capital expenditures, growth plans and operating results?
Sample Answer
The optimal capital structure is the mix of debt and equity that minimizes a company’s cost of capital while maximizing its value. There are a number of factors that financial managers consider when determining the optimal capital structure, including:
- The company’s riskiness
- The company’s tax status
- The company’s access to capital markets
- The company’s capital expenditures
- The company’s growth plans
- The company’s operating results
The company’s riskiness is an important factor to consider because debtholders are more exposed to risk than equity holders. As a result, companies with higher risk levels tend to have higher costs of debt. The company’s tax status is also an important factor because interest payments on debt are tax-deductible, while dividends are not. This means that companies with higher tax rates can benefit from using more debt in their capital structure.