An optimal capital structure is a mix of debt and equity that maximizes the value of a firm. The optimal capital structure ensures that the cost of capital of the firm is not only low but also minimizes the financial risks that company faces. In general, debt finances provide the lowest cost capital. This is because interest expenses, unlike dividend payment, is an allowable expense for tax purposes. Therefore, it has a low after tax cost compared to dividend payment. On the contrary, debt has a higher financial risk that equity. Payment of debt principal and interest is a legal obligation. Therefore, a firm has to make regular payments failing which it risks being declared bankrupt whereas dividend payment is made at the company discretion. There is no specific yardstick for optimal capital structure, it depends on the situation of a company and the professional judgement of finance experts. This paper discusses the optimal capital structure of Apple.
Apple Inc. is a mature company with a solid reputation. Therefore, it has high sales and net income. The earnings per share for Apple in 2015 was 9.28. Similarly, it has retained earnings of 92,284 million which is almost four times its equity. Therefore, Apple can afford to maintain a low debt level to minimize financial risks. It can reinvest its retained earnings its proposed projects. Retained earnings do not have any cost. Therefore, the company can maintain a debt of 40 percent of its capital structure and 60 percent as equity. Currently, Apple has a debt ratio of 57 percent. It can reduce its debt level by repaying back some of the debt. It can use the earnings instead of paying dividends.
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