Optimal Capital Structure for an Emerging Market Firm in a Mature Business Sector

In this work, minimum cost criteria are used to determine the optimal capital structure for a firm in the food processing industry of an emerging market (Colombia). It is an excellent opportunity to examine how the components of the firm's financial statements interact to calculate optimal capital structure. Several issues related to debt policy are addressed and harmonized to demonstrate that optimal debt ratio simultaneously maximizes the enterprise and share value, and minimizes the weighted average cost of capital (WACC). Recursive calculation is used to establish equity value using the firm's fundamentals, and it is compared to a recent market transaction. This case permits an observation of the mechanisms associated with capital structure theory, and implements them through concrete results in a real-world firm, enabling analysts to propose a level of indebtedness restructuring.