Finding the Optimal Capital Structure for IBM

Tong Wang

Co-Presenters: Individual Presentation

College: College of Business and Public Management

Major: BS.FINANCE

Faculty Research Mentor: Kakolyris, Andreas  

Abstract:

This study examines IBM’s optimal capital structure by simulating changes in the weighted average cost of capital (WACC) under alternative leverage scenarios. We analyze how variations in the debt–equity ratio influence IBM’s cost of capital, risk profile, and overall firm value. As a long-established technology company undergoing strategic transformation toward hybrid cloud and artificial intelligence, IBM provides an appropriate case for evaluating how mature firms balance financial flexibility with the benefits of debt financing. Using the synthetic credit rating approach, we estimate the effects of incremental leverage on beta, borrowing costs, and market valuation based on publicly available financial data. Prior literature suggests that moderate leverage can enhance firm value through tax advantages while excessive debt increases financial risk and capital costs. Our analysis models these trade-offs to identify the range of capital structures that minimizes WACC and maximizes firm value. The findings contribute to understanding how financing decisions support strategic repositioning while maintaining investment-grade stability, offering insights into capital structure optimization for mature firms in the evolving technology sector.