Capital structure is a mix of debt and equity, this decision is very important for a company as it represents a cost to the company because it is money taken in loan. This decision is very critical for the company due to the different tax implications of the debt and also the effect of corporate taxes on the company's profitability and revenue. Companies must exercise caution in their lending activities in order to avoid financial difficulties, excessive risks and even bankruptcy. A company's debt-to-equity ratio also affects the company's financing costs and reduces its value to shareholders. The debt-to-equity ratio also measures the company's financial leverage by dividing the company's total liabilities by its shareholders' equity. It indicates the percentage of equity and debt used by the company to finance its operations. In the financing decision the company must decide its capital structure. Here the debt to equity ratio is decided. The capital structure decision or a financing decision shown on the left side indicates the liabilities on the balance sheet while the investment decision shown on the right side indicates the assets on the balance sheet. Capital structure shows the relative relationship between debt and equity. The capital structure does not have much impact on company profits, but it certainly influences the share of profits obtainable for shareholders. OPTIMAL CAPITAL STRUCTURE Optimal capital structure indicates the best debt-to-equity ratio for a company that maximizes its value. that is, the optimal capital structure for a firm is one that offers a balance between the idyllic ranges of the debt-to-equity ratio, thus minimizing the firm's cost of capital. Theoretically, debt financing usually offers the lowest cost of capital because… middle of the paper… the cost of capital (WACC) is minimized and the increase in firm value is maximized. This means that the optimal capital structure for the firm is the one that minimizes the WACC. A company's capital structure shows how it finances its operations and grows using distinctive sources of funds. A company's debt comes in the form of bonds issued or long-term notes payable, on the other hand, equity capital is classified as common stock, preferred stock, and retained earnings. Short-term debt, such as working capital requirements, are also considered part of the capital structure. When we talk about a company's capital structure, it is clear that they are referring to a company's debt-to-equity ratio, which gives insight into how risky a company is. Usually a company that is financed more heavily through the use of debt presents greater risks, since the company is relatively indebted.