Major determiants capital structure
Answers
Explanation:
The following are some of the major determiants capital structure by a firm.
1. Position of cash flow: The cash flow position should be such that it must be able to fulfill its cash obligations and in addition is also left with some buffer. The capital structure of the company should be decided taking this factor into consideration.
2. Debt-service coverage ratio (DSCR): A higher DSCR indicates that the company is better able to meet its cash and interest obligations and thereby, can increase the component of debt in the capital structure.
3. Cost of debt: Cost of debt is the interest rate to be paid on debt. Higher the cost of debt, lower the proportion of debt in the capital structure and vice-versa.
4. Tax rate: As interest payable on debt is a tax deductible item, therefore tax rate directly affects the cost of debt and thereby, the proportion of debt in capital structure. Higher the tax rate, cheaper is the debt, thereby, higher can be the proportion of debt in capital structure.
5. Control considerations: Higher equity reduces the control of management in the company. Such considerations must be taken into account while taking the capital structure decisions.
THE FACTORS INFLUNCE THE DETERMIANTS ARE
1.FINANCIAL LEVERAGE:The use of long term fixed interest bearing debt and prefernces share capital along with equity and share capitals is called FINANCIAL LEVERAGE