1. As a financial consultant , give the list of any 10 factors which affect the choice of capital structure
Answers
Explanation:
- Cash flow position.
- Interest Coverage Ratio.
- Debt Service Coverage Ratio.
- Return on Investment.
- Cost of debt.
- Tax rate.
- Cost of Equity.
- Flotation Costs.
Answer:
As a financial consultant , the list of any 10 factors which affect the choice of capital structure are as follows:
(1) Cash Flow Position
(2) Interest Coverage Ratio-ICR
(3) Debt Service Coverage Ratio-DSCR
(4) Return on Investment-ROI
(5) Cost of Debt
(6) Tax Rate
7) Cost of Equity Capital
(8) Floatation Costs
(9) Flexibility
(10) Regulatory Framework
Explanation:
Under the capital structure, a choice on the extent of long term sources of capital is entirely set in stone. The most ideal extent decides the ideal capital structure. That is the need of the organization in light of the fact that EPS is the most extreme on it.
The list of any 10 factors which affect the choice of capital structure
(1) Cash Flow Position:
While settling on a decision of the capital structure the future cash flow position ought to be remembered. Debt capital ought to be utilized provided that the cash flow position is great on the grounds that a ton of cash is required to make installment of premium and discount of capital.
(2) Interest Coverage Ratio-ICR:
With the assistance of this proportion, a work is made to figure out how often the EBIT is accessible for the installment of interest. The limit of the organization to utilize debt capital will be in direct extent to this proportion.
(3) Debt Service Coverage Ratio-DSCR:
This proportion eliminates the shortcoming of ICR. This shows the cash flow position of the organization.
(4) Return on Investment-ROI:
The more noteworthy return on investment of an organization expands its ability to use more debt capital.
(5) Cost of Debt:
The limit of an organization to take debt relies upon the expense of debt. On the off chance that the rate of revenue on the debt capital is less, more debt capital can be used as well as the other way around.
(6) Tax Rate:
The rate of duty influences the expense of debt. In the event that the rate of expense is high, the expense of debt diminishes. The explanation is the derivation of interest on the debt capital from the benefits thinking of it as a piece of costs and a saving in charges.
(7) Cost of Equity Capital:
The expense of equity capital (it implies the assumptions for the equity investors from the organization) is impacted by the utilization of debt capital. In the event that the debt capital is used more, it will expand the expense of the equity capital.
(8) Floatation Costs:
Floatation costs are those costs that are brought about while giving protections (e.g., equity shares, inclination shares, debentures, and so forth.).
(9) Flexibility:
As per this rule, the capital structure ought to be genuinely adaptable. Flexibility truly intends that, assuming need be, how much capital in the business could be expanded or diminished without any problem. Diminishing how much capital in business is conceivable just on account of debt capital or inclination share capital.
(10) Regulatory Framework:
Capital structure is additionally impacted by unofficial laws. For example, banking organizations can raise assets by giving offer capital alone, no other sort of safety.