Capital Structure Planning

After computing the cost of capital, the firm determines its ‘capital structure’ as a part of the financing decision. When choosing a capital structure, the weighted average cost of capital, or WACC, is useful. It serves as the foundation for assessing different funding sources, assisting the business in determining whether or not to obtain the necessary funding source. By using a suitable capital mix, every company seeks to minimise its weighted average cost of capital (WACC), since a lower WACC enables a company to distribute higher profits to its owners. To maximise shareholder wealth, a company wants to have the ideal capital mix of debt and equity.