TARGET CAPITAL STRUCTURE

Target Capital Structure



Target Capital Structure

The target (optimal) capital structure is simply defined as the mix of debt, preferred stock and common equity that will optimize the company's stock price. As a company raises new capital it will focus on maintaining this target (optimal) capital structure(Graham Harvey 2001).

There are four factors that affect the target capital structure:

Business Risk

The first is the firm's business risk, or the riskiness that would be inherent in the firm's operations if it used no debt. The greater the firm's business risk, the lower the amount of debt that is optimal(Baker Wurgler 2002).

Tax Position

The second ...