Explain briefly any four factors which affect the choice of a company.
Answers
Answer:
1. Risk considerations – Financial risk and operating risk affect the capital structure of a company. Use of debt increases the financial risk of a business because company will have to pay interest and principal amount. Business or operating risk depends upon the fixed operating costs. Higher fixed operating costs result in higher business risk. If a firm’s business risk is lower, its capacity to use debt is higher.
1. Risk considerations – Financial risk and operating risk affect the capital structure of a company. Use of debt increases the financial risk of a business because company will have to pay interest and principal amount. Business or operating risk depends upon the fixed operating costs. Higher fixed operating costs result in higher business risk. If a firm’s business risk is lower, its capacity to use debt is higher. 2. Conditions of capital market – The time of issue of shares and the composition of the buyers should be kept in mind. If capital market is depressed i.e., investors are not willing to subscribe to shares, a company should rely on debt as a source of finance.
1. Risk considerations – Financial risk and operating risk affect the capital structure of a company. Use of debt increases the financial risk of a business because company will have to pay interest and principal amount. Business or operating risk depends upon the fixed operating costs. Higher fixed operating costs result in higher business risk. If a firm’s business risk is lower, its capacity to use debt is higher. 2. Conditions of capital market – The time of issue of shares and the composition of the buyers should be kept in mind. If capital market is depressed i.e., investors are not willing to subscribe to shares, a company should rely on debt as a source of finance. 3. desire to control – Desire of the promoters to have control over the company is an important factor. If the promoters want to retain control, they will issue more debentures and preference shares and less equity shares.
1. Risk considerations – Financial risk and operating risk affect the capital structure of a company. Use of debt increases the financial risk of a business because company will have to pay interest and principal amount. Business or operating risk depends upon the fixed operating costs. Higher fixed operating costs result in higher business risk. If a firm’s business risk is lower, its capacity to use debt is higher. 2. Conditions of capital market – The time of issue of shares and the composition of the buyers should be kept in mind. If capital market is depressed i.e., investors are not willing to subscribe to shares, a company should rely on debt as a source of finance. 3. desire to control – Desire of the promoters to have control over the company is an important factor. If the promoters want to retain control, they will issue more debentures and preference shares and less equity shares. 4. Regulatory framework – The management of a company should consider regulatory framework provided by Companies Act, SEBI Guidelines, etc. Raising funds from banks and financial institutions require fulfilment of some norms.
Hope it helps you