Which term defines the maximum theoretical capital structure ratio of debt and equity that minimizes a firm’s Weighted Average Cost of Capital (WACC)?

Explanation

• The Optimal Capital Structure is the precise mix of debt and equity financing that minimizes the company’s overall WACC while maximizing firm value.
• Adding debt provides tax shields up to a point, beyond which financial distress and bankruptcy costs outweigh tax benefits.
• Trade-off theory explains how firms balance tax shields against financial distress costs to find this optimal balance.