What is Optimum Capital Structure?

Optimum capital structure is that capital structure at which the value of equity share is the maximum while the average cost of capital is the minimum. The value of equity share mainly depends upon the earnings per share. The theory of capital structure deals with the issue of the right mix of debt and equity in the long-term capital of the company. If a company raises debt, the value of equity shares goes up to a certain point. If the debt increases beyond that point, the value of equity shares goes down. Therefore, the company should determine its appropriate level of debt-equity mix which is known as optimum capital structure.