Capital structure is a mix of debt and equity, this decision is very important for a company as it represents a cost to the company as it is borrowed money. This decision is very critical for the company due to the different tax implications of debt securities and also the effect of corporate tax on the profitability and income of the company. Businesses must be careful in their borrowing activities to avoid financial distress, excessive risk, and even bankruptcy. A company's debt-to-equity ratio also affects the company's borrowing costs and reduces its value to shareholders. The debt-to-equity ratio also measures a company's financial leverage by dividing the company's total liabilities by shareholders' equity. It shows what proportion of equity and debt the company used to finance its assets. When deciding on financing, a company must decide on its capital structure. Here the ratio of debt and equity is decided. The capital structure decision or a financing decision shown on the left side shows the liabilities on the balance sheet while the investment decision shown on the right side shows the assets on the balance sheet. Capital structure shows the relative relationship between debt and equity. Capital structure does not have much impact on corporate profits, but it surely affects the share of profits achievable for shareholders. OPTIMAL CAPITAL STRUCTURE The optimal capital structure indicates the best debt ratio for a company that maximizes its value. that is, the optimal capital structure for a company is one that provides a balance between the idyllic ranges of debt and equity, thereby minimizing the company's cost of capital. Theoretically, debt financing generally offers the lowest cost of capital due to this...... middle of paper ...... the cost of capital (WACC) is minimized and the value of the company increases to the maximum. This means that the optimal capital structure for the firm is the one that minimizes WACC. A company's capital structure shows how it finances its operations and grows using distinct sources of financing. A company's debt comes in the form of issued bonds or payable long-term notes, while equity is classified as common stock, preferred stock, and retained earnings. Short-term debt, for example working capital requirements, is also considered part of a capital structure. When we talk about the capital structure of a company, it is understood that it is the debt-to-equity ratio of the company, which helps to understand how risky a company is. Usually, a company that is more heavily debt-financed is more risky because the company is relatively highly leveraged..