Advertisement Remove all ads

Explain Briefly Any Four Factors Which Affect the Choice of Capital Structure of A Company. - Business Studies

Explain briefly any four factors which affect the choice of capital structure of a company.

Advertisement Remove all ads

Solution

Factors affecting the choice of capital structure of a company:

  • Cash flow: Debt should be opted by the company only if it has a strong cash flow position. This is because cash would be required to repay the principal along with the interest rate on the debt.
  • Debt-service coverage ratio (DSCR): It depicts the cash payment obligations of a company as against its availability of cash. In case DSCR is high, the company can opt for more debt.
  • Equity cost: The cost of equity depicts the financial risk faced by the company. If the financial risk is higher, then the shareholders expect a higher return. This, in turn, implies a rise in the cost of equity. However, if the cost of equity is high, then it would be difficult for the company to opt for more equity
  • The condition of the stock market: In situations of good stock market conditions, the company can easily opt for equity capital and vice versa.
  Is there an error in this question or solution?
Advertisement Remove all ads
Advertisement Remove all ads
Advertisement Remove all ads
Share
Notifications

View all notifications


      Forgot password?
View in app×