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Evaluate the methods by which a firm may attempt to choose its optimal capital structure.
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Evaluate the methods by which a firm may attempt to choose its optimal capital structure. The issue of an optimal capital structure has been a largely debated one over the past number of years, with many methods being put forward by many different authors. The question many of these authors attempt to answer is whether or not capital structure matters? Capital structure is the way a firm finances its investments, whether it uses equity, debt or a mixture of both. If capital structure can affect firm value then is there a "golden rule" to obtain an optimal capital structure to maximise firm value? Fairchild (2003) looked at the determinants of BT's debt levels from 1998-2002 and what it showed us about optimal capital structure. BT is an extremely useful case as over the period 1998-2001 they dramatically increased their debt to finance its bidding for 3G mobile licences, during which time their...
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