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Question
Arth Nivesh Limited has a high fixed operating cost. The Finance Manager informs the Chief Finance Officer that, in case the company decides to take a loan for its future financial needs, its fixed financial cost will also increase, leading to an overall increase in cost. Identify the factor affecting the choice of capital structure discussed above.
Options
Cost of debt
Floatation cost
Risk consideration
Control
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Solution
Risk consideration
Explanation:
The situation shows that Arth Nivesh Limited already has a high fixed operating cost, and taking a loan would add fixed financial costs like interest payments. This increases the company’s overall risk, especially if earnings fall. Hence, the factor affecting the choice of capital structure here is risk consideration, as more debt raises the financial risk of the business.
