Question

What are the various steps involved in identifying optimal capital structure? Explain. What are the various steps involved in recapitalizing debt financing? Explain.

Answer 1

Answer :-

First you have to know that what is a optimal capital structure. A Optimal capital structure is such which includes a best mix of debt and equity in the capital of the business . A mix should be such which can maximize the price of the stock in the market and also makes the cost of capital at minimum level.

The Steps involved in the estimation of optimal capital structure is that :-

1. Estimate the amount of capital that is sufficient for the business. It means the median capital structure of the company.
2. Then find out the cost of the debt and the cost of the equity for the company.
3. Then find out the fluctuations in the market prices and then spread out the debt offering of the company.
4. The find out the how much of maximum debt a company can arranged for its capital structure.
5. Then then make a best mix as per the analysis of this information , Take a debt upto a level that company can bear the financial risk.

Recapitalising Debt Financing :- A recapitalizing debt financing includes the restructuring of the company debt. Recapitalising debt financing means financing the business by debt and buy back the equity.

the various steps involved in recapitalizing debt financing are :-

1. Analyse the amount that a company wants to issue the debt.
2. Now analyse the expenses or cost of financing the debt.
3. Third step is go to bank or any other place and asks for a loan
4. Now analyse the cost of debt and think as it is beneficial or not
5. Taking a view in mind about liquidity position for timely payment of the interest on debt