Determining Optimal Capital Structure: An Empirical Example

A hallmark of most corporate finance classes is a dedicated treatment of capital structure, with particular emphasis given to finding the optimal mix of debt and equity. While textbooks typically include multiple chapters on this topic, the general conclusions are often very theoretical and high level, leaving students to wonder how such a process might actually play out in practice. We address this deficiency by illustrating an empirical approach for determining optimal capital structure. We begin with traditional capital structure models and extend the analysis to include both market and industry level examples.