## Optimum Capital Structure

### Definition

The capital structure is said to be optimum when the firm has selected such a combination of equity and debt that the wealth of the firm is maximum.

### Characteristics at the Optimum Point

At the optimum capital structure:

1. Cost of capital is minimum (Ko is at its lowest)

2. Market Price Per Share (MPS) is maximum

3. Value of the firm is maximum

### Conceptual Linkage

```

Optimum Capital Structure → Minimum WACC (Ko) → Maximum MPS → Maximum Firm Value

```

### Why It Matters

The goal of financial management is to maximise shareholder wealth (= MPS × number of shares). Since MPS depends on EPS and the firm's risk profile, choosing the right debt-equity mix that balances cost and risk is essential.

⚠️ Common exam mistakes

Confusing 'optimum capital structure' with 'maximum debt' — using only debt is not optimum because financial risk rises sharply.
Linking optimum capital structure to maximum EPS only — the correct linkage is to maximum MPS / firm value (which considers risk, not just earnings).
Forgetting to mention that cost of capital is MINIMUM at the optimum point (not maximum).

Reference: Optimum CS — Institute of Chartered Accountants of India

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Optimum Capital Structure

Worked example

⚠️ Common exam mistakes