Optimal capital structure

Abstract

Substantial parts of the literature concerning capital structure have dealt with issues regarding the leverage ratios. These leverage ratios have been analyzed in all kinds of ways, where most studies have explained observed patterns. Our research will also deal with leverage ratios but in an entirely new way. Our problem concerns the practical matter of deciding an appropriate capital structure and the possibility of improvements, which are formulated below.

· How do the case companies decide their capital structure? · Are their current capital structures optimal or is there room for improvements?

We have studied three companies within the real estate industry due to comparable issues. Our result reveals that the companies do not use any mathematical model when deciding their capital structure but they do consider many important factors. The business and financial risk have the largest impact on the decision even though there are individual variations. Tradition is another factor that seem to influence the management a lot. Our improvement investigation of the three case companies reveals three different scenarios. Castellum could really improve their capital structure by increasing the leverage level without causing financial distress. Wallenstam had a capital structure that was optimal or at least very close to optimal. Finally, Platzer had a leverage level that was too high since their total risk exceeded an appropriate capital structure.