Optimum Capital Structure (Cost of capital approach)
Originally published: 20/06/2016 16:49
Last version published: 12/04/2017 15:49
Publication number: ELQ-60446-2
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Optimum Capital Structure (Cost of capital approach)

An excel model to estimate the ideal capital structure for a corporation.

This model allows you to estimate an "optimal" Capital structure for a company using the cost of capital approach. An option in the model also allows you to build in indirect bankruptcy cost by letting your operating income vary with your bond rating.

Note: this model is being shared with the authorization of Professor Aswath Damodaran from NYU Stern Business School (www.damodaran.com)

This Best Practice includes
1 Excel Model File

Prof. Aswath Damodaran offers you this Best Practice for free!

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Further information

Provides a picture of your firm's current cost of capital and debt ratio, and compares it to your firm's optimal debt ratio and the cost of capital at that level. The firm value is computed at each debt ratio, based upon how the expected operating income and the cost of capital. The optimal debt ratio is that ratio at which firm value is maximized. It might not be the same point at which cost of capital is minimized.

This spreadsheet allows you to compute the optimal capital structure for a non-financial
service firm

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