Corporate Finance ASSIGNMENT ONE

An optimal capital structure of a firm is the perfect debt-to-equity ratio value that is able to maximise its overall value (Bradley, Jarrell, & Kim, 1984). In essence, it is also a point whereby an entity is said to have attained a required harmony or rather balance in regards to a recommended range of both debt and equity funds while at the same time tries to minimise the level of cost of capital for its operations.

Elders Limited can be said to have attained an optimal capital structure because its long term debt/ total assets value as at 2015 stands at 0.10, which is way below the industry average of 0.15; long term debt/total equity as at that period stands at 0.18 against an industry average of 0.56; while its business risk ratio value stood at 0.09 against 0.12 being the average within the period. Considering the fact that all of these ratios are positioned below the industry means that the company has made sure not to over depend on debt funds to finance its operational activities over the years but instead kept the debt funds slightly lower than equity funds hence minimising the overall cost of capital for its funding needs.

References List

Bradley, M., Jarrell, G.A.& Kim, E., 1984. On the existence of an optimal capital structure: Theory and evidence. The journal of Finance, 39(3), pp.857-878