Debt and Equity Capital: Finding the Optimal Balance of the Enterprise

Abstract

Every company must determine the right mix of debt and equity to finance its operations and growth. This decision is crucial, as it directly impacts financial stability, profitability, and long-term sustainability. Debt financing allows businesses to access capital without diluting ownership, but excessive borrowing increases financial risk and interest expenses. On the other hand, equity financing provides stability and flexibility but may lead to reduced control and lower returns for existing shareholders. Finding the optimal balance between debt and equity is a complex process that depends on factors such as industry conditions, cash flow stability, and market expectations. Companies with steady revenues may afford higher leverage, while businesses in volatile sectors often rely more on equity to avoid excessive financial strain. The cost of capital, tax advantages of debt, and investor confidence also play a significant role in shaping a company's capital structure. This article explores key strategies for optimizing capital structure, assessing financial risks, and achieving a sustainable mix of debt and equity that aligns with a company's strategic goals. CZU: 658.14; JEL: G2; H63