Question

Explain the objects of capital structure planning and the factors affecting it?

Answer 1

Answer:

Some of the factors affecting the capital structure of a company are as follows: Capital structure means the proportion of debt and equity used for financing the operations of business. ... The capital structure should be such which increases the value of equity share or maximizes the wealth of equity shareholders.

Explanation:

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Answer 2

The objects of capital structure planning and the factors affecting it by Interest Coverage Ratio-ICR,Cash Flow Position,Cost of Debt,Tax Rate, Flexibility.

Explanation:

1.Interest Coverage Ratio-ICR

This ratio attempts to determine the number of EBITs available to pay interest. A company's ability to use its borrowings is directly proportional to this ratio.

2. Cash Flow Position

Future cash flows should be considered when choosing a capital structure. Borrowing requires a lot of cash  to pay interest and recover capital, so it should only be used if you have really good cash flow.

3.Cost of Debt

A company's borrowing capacity  depends on its cost of debt. A lower interest rate on borrowing allows more use of the borrowed money and vice versa.

4. Tax Rate:

Tax rates affect the value of debt. Higher tax rates reduce the value of debt. The reason is that interest on borrowings is withheld from profits, which is considered part of the cost and saves tax.

   5.Flexibility

According to this principle, the capital structure must be sufficiently flexible. Flexibility means that your business's capital can be easily increased or decreased as needed. A reduction in the capital of a business is possible only if it has borrowings or preferred stock.