IntroductionThe relationship between capital structure and firm value has been frequently discussed in the literature by different researchers, in both theoretical and empirical studies. It was also discussed whether the company has an optimal capital structure adopted by a sole proprietorship or whether the proportions of debt usage have absolutely no relation to the value of the company individual. A company can choose a combination of three financing methods. i.e. issuing shares, borrowing from the market and using retained earnings. The ratio of this combination of funds depends solely on the company and is known as the optimal capital structure of the company. This leads to the different theories of capital structure. These theories explain their views on optimal capital structure, how optimal capital structure can increase firm value and its impact on the firm's cost of capital. Capital structure refers to the mix of debt and equity used by a company in financing its assets. The capital structure decision is one of the most important decisions made by financial management. The capital structure decision is at the center of many other decisions in corporate finance. These include dividend policy, project financing, issuance of long-term securities, merger financing, etc. One of the many objectives of a corporate financial director is to ensure the lowest cost of capital and thus maximize shareholder wealth. Capital structure is one of the effective management tools to manage the cost of capital. An optimal capital structure is achieved at a point where the cost of capital is minimum. Pakistan is a developing country with three stock exchanges, with the Karachi Stock Exchange (KSE) being middle of paper..... .icult in terms of cost and technical difficulties (Shah and Hijazi 2004). The main sources of debt in Pakistan have been commercial banks, which do not encourage long-term lending and were largely independent of market-based debt until mid-1994, when the government decided to remove most constraints. One of these was to amend company law to allow legal entities to contract debt directly on the market in the form of TFCs (Term Finance Certificates). The corporate bond market therefore has a limited history and is currently growing. This explains why Pakistani companies on average have more short-term financing than long-term financing. Booth et al (1999) also pointed out in their study on the determinants of capital structure in developing countries including Pakistan that the use of short-term financing is more important than long-term financing in countries in development..