Question

Discuss the various factors affecting the capital structure decisions GIVING APPROPRIATE EXAMPLES.

Answer 1

The capital structure of a firm is based on the arrangement of different sources of funds which are used to finance the operations of the firm. It is generally consists of debt, preferred stock and common equity. There are various factors that affecting the capital structure decisions, some of them are following –

• Management control as the equity funds dilute the control over company
• Cost of capital of difference sources of fund; the cost of debt and cost of equity for the company and also the cost of raising each category of fund.
• Tax Consideration as companies get tax advantage on debt capital
• Growth and stability in the revenue stream of the company
• The level of profit the company able to generate on different capital structure
• Management’s personal choices and preferences towards capital structure
• The market conditions, selection of a capital structure sometimes depends on the short term and long term market condition.
• Industry trends on capital structure on that particular industry. For example IT industries use to have high proportion of equity and low proportion of debt in their capital structure.