When assessing a company's capital structure, what is the primary goal?

The primary goal when assessing a company's capital structure is to maximize the market value of the firm while minimizing the weighted average cost of capital (WACC). This means that a company aims to find the optimal mix of debt and equity financing that enhances its overall value. By doing so, a company can achieve a lower WACC, which reflects the average rate it must pay to finance its assets, thus making it more attractive to investors.

When the WACC is minimized, it indicates that the company is effectively managing its cost of capital, enabling it to undertake more profitable projects and investments. This balance ultimately drives up the market valuation of the company, as investors are willing to pay more for a company that efficiently utilizes its capital and generates higher returns.

Achieving this goal involves careful consideration of how much debt versus equity financing to use. If a company relies too heavily on debt, it may face financial distress and increased risk, while over-reliance on equity may dilute ownership and returns. Hence, the focus is on creating a capital structure that supports growth and stability, which directly contributes to maximizing the firm’s market value.