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Explain the Following as Factors Affecting Choice of Capital Structure: Cost of Equity - Business Studies

Explain the following as factors affecting the choice of capital structure:

Cost of equity

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Solution

Cost of equity: In terms of dividend payments, higher the cost of equity, lower is its proportion in total capital.

Use of debt increases ⇒ Financial risk increases ⇒ Expectation of rate of return increases ⇒ Difficult to opt for ⇒ Equity cost increases

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